Diversification is one of the most basic tenets of sound investment management. Whether you are a high-net-worth investor or a middle-class retiree, spreading your investments across different asset classes, sectors, and geographies is widely accepted as a prudent strategy to reduce risk. Yet time and again, investors discover that their portfolios were concentrated in one or a few holdings, exposing them to significant and avoidable losses. Legal action may be warranted when this lack of diversification results from negligent or inappropriate advice by an investment advisor.

In Ontario, investment advisors owe clients a duty to recommend suitable investments, taking into account the client’s risk tolerance, objectives, and financial circumstances. A failure to diversify, primarily when the risks of concentration were known or foreseeable, may constitute a breach of that duty.

Understanding Portfolio Concentration and Overweighting

A portfolio is concentrated when a significant percentage of its value is allocated to a single investment, issuer, sector, or geographic region. Overweighting is when an investment holds a higher proportion of a particular asset than is typical in a diversified portfolio.

For example, a retiree with 80 per cent of their portfolio invested in a single publicly traded stock, such as a resource company, bank, or tech firm, has a highly concentrated and overweighted position. If that company suffers a sudden drop in value, the investor could lose a substantial portion of their savings.

In some cases, investors knowingly accept such risks, but in many instances, they are unaware that their portfolio lacks appropriate diversification. This is especially problematic when the concentration results from an advisor’s recommendation that failed to consider the investor’s overall financial picture or risk tolerance.

The Legal Duty to Diversify: Advisor Obligations in Ontario

Investment advisors in Ontario are subject to a regulatory and common law duty to recommend suitable investments. This duty is codified in part by rules under the Canadian Investment Regulatory Organization (CIRO) and the Mutual Fund Dealers Association of Canada (MFDA), as well as the obligations imposed by the Ontario Securities Commission (OSC). Under these rules, advisors must “know their client” and ensure that any investment advice or decisions are suitable in light of the client’s personal circumstances.

Diversification is often an implicit part of the suitability analysis. While there is no strict legal requirement to diversify in every case, concentration can be evidence of a failure to adhere to the standard of care expected of investment professionals. Courts have held advisors liable when they failed to advise against, or actively encouraged, excessive concentration, especially where it led to foreseeable harm.

When Concentration Is a Red Flag for Negligence

Not every concentrated portfolio constitutes negligence. Sometimes, clients may have a high risk tolerance or specific investment strategies that justify overweight positions. However, certain red flags may indicate advisor negligence:

• The client was unaware of the degree of concentration or its implications
• The advisor failed to warn the client about the risks of overweighting
• The concentration conflicted with the client’s stated risk tolerance or investment objectives
• The advisor ignored existing holdings (e.g., employer stock) when recommending additional investments in the same company or sector
• The portfolio’s performance became dangerously dependent on the success of a single asset or sector

In such cases, the advisor’s failure to act prudently may constitute a breach of fiduciary duty, a violation of regulatory rules, or a basis for negligence under tort law.

Who Is Most at Risk? Vulnerable Investor Profiles

Certain types of investors are especially vulnerable to harm caused by concentration. Retirees, for example, often rely on a stable income and may have little opportunity to recover from market downturns. Concentrating their portfolio in one or two dividend-paying stocks may initially appear safe, but it can be catastrophic if those companies falter.

Similarly, investors in exempt market securities or alternative investments, such as private placements or real estate investment trusts (REITs), may be steered into concentrated holdings that lack liquidity or transparency. Legal claims may arise if those products represent a disproportionate share of the portfolio, and the investor was not adequately informed of the risks.

Clients who trust their advisors entirely, such as seniors, individuals with language barriers, or those with limited financial literacy, are also at elevated risk when diversification is ignored.

Legal Remedies for Investors Harmed by Lack of Diversification

Investors who suffer losses due to an advisor’s failure to diversify may be entitled to compensation through civil litigation or regulatory complaint processes. Potential legal claims include:

Negligence

Under common law, investors can sue their advisors for negligence if they can prove that:

1. The advisor owed them a duty of care;
2. The advisor breached that duty by failing to diversify appropriately;
3. The breach caused foreseeable financial harm; and
4. The investor suffered actual damages.

Advisors are judged by the standard of a reasonable professional in similar circumstances. Expert evidence may be used to establish what a prudent advisor would have done when constructing a balanced and diversified portfolio.

Breach of Fiduciary Duty

The courts may find a fiduciary relationship in many advisor-client relationships, especially those involving discretionary accounts or deep reliance on the advisor’s expertise. In such cases, the advisor must act loyally, avoid conflicts of interest, and prioritize the client’s best interests.

Failing to recommend diversification, or intentionally concentrating a portfolio for personal gain, such as to earn higher commissions, may be grounds for a breach of fiduciary duty claim.

Breach of Statutory or Regulatory Obligations

Investors may also complain to regulatory bodies such as the OSC or CIRO. These regulators have the authority to sanction advisors who violate “know your client” or suitability rules, and findings from these bodies may support civil claims. However, regulatory complaints typically do not result in investor compensation unless part of a broader enforcement settlement.

In some cases, investors may pursue arbitration or mediation through programs like the Ombudsman for Banking Services and Investments (OBSI), although compensation limits apply.

Building a Strong Case for Investment Advisor Negligence

To succeed in a legal claim based on lack of diversification, investors must provide clear evidence of their financial profile, objectives, and the advice they received. Key documents include:

• “Know your client” forms and updates
• Portfolio account statements over time
• Email or written communications with the advisor
• Notes from meetings or calls
• Internal compliance or supervisory records (often obtained during discovery)

In addition, expert testimony from a qualified investment professional may be necessary to establish that the portfolio was excessively concentrated and that the advisor’s conduct fell below professional standards.

The High Cost of Negligent Investment Advice

Concentrated and overweight portfolios can result in serious financial losses, especially when markets turn volatile. While some investors knowingly accept such risks, others are unwittingly exposed due to negligent or unsuitable advice. In Ontario, investment advisors are legally and professionally obligated to provide prudent, balanced advice tailored to the client’s financial situation and goals. When they fail to do so, and clients suffer as a result, legal remedies may be available.

Milosevic & Associates: Trusted Legal Representation in Financial Advisor Negligence Claims

If you are an investment advisor or other financial professional facing a complaint, an investigation, or a disciplinary hearing, you need a strong legal defence. Our highly knowledgeable Toronto investment loss lawyers at Milosevic & Associates are dedicated to protecting you, your reputation, and your ability to work. Call us today at 416-916-1387 or contact us online to schedule a confidential consultation.