Improper Asset Allocation


Improper asset allocation refers to the percentage of an investor’s capital spread across different investment classes. Misallocation can give rise to a FINRA arbitration claim. There are many investment classes. Some common examples include stocks; bonds and/or fixed income investments; commodities; real estate; alternative investments; and cash.

Improper allocation is a function of investor profile, investment classes, and percentages.

As part of both its fiduciary duty and compliance with FINRA’s rules governing suitability, broker-dealers must take care to ensure they recommend the proper asset allocation for an investor given their:

  • Investment objective,
  • Risk tolerance,
  • Time horizon, and
  • Specific financial circumstances.

A portfolio consistent with an investor’s investment objectives, risk tolerance, and goals is essential to manage risk. Spreading investments across different asset classes, may reduce the impact of market volatility in an investor’s portfolio because different asset classes behave differently under different market conditions.

For example, suppose a portfolio is allocated in 50% stocks and 50% bonds. Market conditions might cause a decrease in the value of stocks, while also creating an increase in the value of bonds. Accordingly, increased bond prices might insulate the investor against the losses sustained from the decrease in value of stocks.

Examples of an Improper Asset Allocation

The proper allocation is investor specific. Below are two, generic hypothetical examples.


A retiree with a low risk investor profile should have predominantly low-risk investments.

Consider a retire whose investment profile requires a low-risk portfolio. A low risk portfolio might mean a high percentage in cash and historically safe, fixed-income investments. Given the retiree’s investment profile, the broker-dealer should not invest his portfolio predominantly risky, speculative stocks. This conduct could give rise to winning claim in a FINRA case.


A corporate executive overexposed to company stock could give rise to a FINRA arbitration based on improper allocation.

Suppose a corporate executive receives a windfall of company stock as part of a bonus. The windfall of stock becomes the primary asset held in the executive’s portfolio. Here, the broker-dealer should recommend to diversify the portfolio in other asset classes. That way, the performance of the portfolio does not hinge on the performance of the company stock.

If you believe that your portfolio has been allocated inconsistent with your investment objectives, risk tolerance and investment goals, you should content a professional to assess your specific situation.

*The Law Offices of Patrick R. Mahoney is a full service law firm with extensive experience litigating cases involving a host of securities-related issues. This page is for information purposes only and does not constitute legal advice, nor is it a comprehensive explanation of all improper asset allocation issues. If you believe you have a claim, you should speak to competent counsel to better understand your options. Or, contact us.*