%2010.svg){kind=logo}
Why examiners care
The forms concentration takes
Concentration is not a single number. A portfolio can be concentrated along several dimensions at once, and each one matters separately:
- Single-name concentration — too much in one stock or bond issuer.
- Sector concentration — heavy exposure to one industry (e.g., 40% technology).
- Asset-class concentration — equity-heavy or alternative-heavy relative to the client's policy.
- Issuer concentration in fixed income — multiple bonds from the same issuer aggregating to a meaningful share.
- Liquidity concentration — too much in illiquid or semi-liquid vehicles relative to the client's spending needs.
Why it draws examination attention
SEC 2026 exam priorities specifically named concentrated positions in complex or volatile products as a focus area. The concern is not that concentration exists — most clients have it, often by choice — but that the firm cannot demonstrate the position is consistent with the client's stated objectives and risk tolerance, and that the firm is monitoring the alignment over time.
Documenting suitability of a concentrated position
For any client whose portfolio holds a position above the firm's defined concentration threshold, the file should answer four questions:
- Why was the position taken (or inherited) — concentrated stock from employment, conviction trade, inherited holding?
- Is it consistent with the client's investment policy statement?
- What is the documented risk discussion with the client about this position?
- What ongoing monitoring is in place — drawdown alerts, hedge consideration, periodic review?
Common policy thresholds
Firm policies often set concentration alerts at 5–10% for single names and 25–35% for sectors, with tighter thresholds for retiree accounts and higher thresholds where written client consent acknowledges the exception. The exact number is less important than whether the threshold is documented, reviewed, and enforced.
How StratiFi thinks about concentration risk
The firms that defend concentrated positions well are not the ones with the most permissive policies — they are the ones that connect the concentration to the client's suitability profile in real time. When a position breaches a threshold, the next decision (rebalance, hedge, exception with documentation) becomes a routine workflow rather than a scramble.
Frequently asked questions
-
What concentration threshold is appropriate?
There is no SEC-mandated threshold. Most firms set 5–10% for single names and 25–35% for sectors, tightened for retiree and conservative accounts. The threshold matters less than whether it is documented, monitored, and enforced consistently. -
Is concentration always a problem?
No. Some clients hold concentrated positions intentionally — founder stock, inherited holdings, conviction trades. The compliance issue is whether the firm has documented why the position is appropriate for that client and how it is being monitored. -
How often should concentration be reviewed?
Best practice is continuous monitoring with quarterly written reviews for accounts above threshold. Annual-only reviews leave a multi-quarter gap that examiners flag.