The energy sector is one of the most volatile sectors on the market, making energy securities unsuitable for most investors. According to CNBC, energy is also one of the worst-performing sectors of the past 10 years. Their report attributes its poor performance in part to growing concerns over climate change, and the growing push for companies to diversify with investments in renewable energy resources.
Both supply and demand for energy commodities fluctuate, making their prices extremely difficult to predict. Some of that fluctuation comes from unforeseen natural disasters. For instance, the price of oil might go up when a hurricane cuts into the supply by destroying offshore production facilities. On the other hand, the supply might suddenly increase when new oil reserves spring up in Texas, causing the price to plummet. In 2020, energy investors hung their hopes on a COVID-19 vaccine when demand for oil slowed down with the rest of the economy. Investors refer to these sudden, drastic price changes as volatility, and it’s this quality that makes oil and gas less-desirable commodities for many investors.
Overconcentration in the Energy Sector: The Financial Fallout
Energy investments are purely speculative and should only appear in portfolios of investors who expressly want to expose themselves to some risk. To ensure they don’t lose too much money, investors who expose themselves to that kind of risk should balance out their portfolios with blue-chip stocks and government bonds. Diversification is an essential component of an investing strategy. Without balancing a portfolio with more stable investments, the broker is essentially gambling with their client’s money. There is simply no reason for concentrating a client’s portfolio in a risky, highly speculative sector. And in some cases, brokers have suffered the consequences of betting heavily on good returns from the energy industry.
FINRA Takes Action
FINRA barred two brokers in 2017 following numerous investor disputes involving the brokers’ over-concentration of client assets in the energy sector. Both brokers entered into Acceptance, Waiver, and Consent (AWC) agreements with FINRA, which allow brokers to neither admit nor deny the regulator’s findings. In their AWCs, they consented to the findings that they had placed over 50% of certain clients’ total net worth in energy securities.
One of these barred brokers had approximately 30 investor disputes in his BrokerCheck record that alleged he had recommended unsuitable energy investments. These disputes were collectively resolved for over $4.8 million. Many of the investors in these disputes pointed to over-concentration of securities in their portfolios, and others alleged that the broker had assured them that these speculative investments did not come with significant risk. The AWC reveals that in 2015 when the energy market experienced a downturn, the broker allegedly assured investors that they should stick to the broker’s strategy. He did this without any consideration for the investor’s financial ability to sustain further losses.
Hopefully, the FINRA ban will help to protect future investors from losing money on risky energy investments.
Why Choose an Energy Security?
Investment advisers have a fiduciary duty to make sure their clients don’t buy too much of a risky stock. You may be wondering: Why would an investment adviser over-concentrate their client’s portfolio in the energy sector? It’s impossible to guess what goes through the mind of a broker who makes an unsuitable investment recommendation, but even experienced investors are prone to chasing fads. Today, trendier securities are more likely to come from the tech sector, but that doesn’t mean that energy has lost its allure for financial advisers who simply like the idea of betting big on a risky security.
Lost Money on Energy Securities?
In the event of over-concentration in the energy sector, investors should seek to recover losses by entering into arbitration. Financial advisers are duty-bound to know how much risk an investor can reasonably tolerate. If you feel your financial adviser or broker exposed your portfolio to too much risk, don’t hesitate to contact the lawyers at Fitapelli Kurta for a free case evaluation. Call (877) 238-4175 or email email@example.com.