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NEWSLETTERS & ALERTS
Investments - Unsuitable
The Gambler and Undue Concentrations
[Photo: The Gambler, a 1974 film by Karel Reisz, Czech-born British Filmmaker]
by Howard Haykin
Now imagine you’re a brokerage customer with Oppenheimer & Co., and the broker recommends a concentrated bet that would invest most (70%) of your portfolio in high yield bonds issued by oil and gas companies (“O&G”). A high risk bet that can pay off big – or bite you in your ass!
Never mind that you’re over 65, partially retired, have a liquid net worth of only $200,000, never invested in anything but equity mutual funds and a real estate investment trust, and really can’t afford any significant losses to your principal.
The bonds fluctuate wildly over the next 3 years but they pay a high interest rate. However, in late 2014, O&G bonds fall dramatically and, by late 2015 and early 2016, many of the O&G issuers that your broker recommended declared bankruptcy. Your high risk bets just bit you in the ass!
RISK TOLERANCE AND INVESTMENT OBJECTIVES MATTER. Concentrated bets may work for brokerage customers with aggressive investing or trading styles and who seek quick, outsized profits. For everyone else, the suitability standard calls for a diversified portfolio that’s based on the “customer’s investment profile.”
[For further details on this case, click on ... FINRA Case #2016049840101.]