Another sign of churning is a repeated cycle of trades. This produces commissions for the investment advisor but does not overall change the value of your portfolio. For example, if the same ten shares of a widget manufacturer are bought and sold 100 times, your portfolio isn’t likely to grow but your broker just made commissions on all 100 of those transactions. Excessive trades may also be concentrated on high-commission products for maximum profit to the financial advisor and broker-dealer.

How Churning Hurts Your Investment Account
It’s investors who are harmed the most by the practice of churning. At their most basic level, these trades are not aligned with the customer’s investment goals. When advisors make decisions about buying and selling securities that place their own needs first, they’re potentially letting prime growth opportunities for their clients slip away.

Excessive trading also generates higher commissions and account fees on investors’ portfolios. These trades benefit the financial advisor and brokerage more than the customer because of the commissions, fees, and other expenses charged; these may eat into any profit gained by the buying and selling of these securities. Each trade comes with these added expenses as the cost of doing business; however, when more trades are made than necessary, what once seemed like reasonable commissions and fees add up quickly. Tax liabilities can increase just as quickly. When a portfolio is being churned, the selected investments need to produce even greater rates of return to cover the expenses of commissions, fees, and taxes.

What You Can Do to Fight Churning
One of the best ways that investors can take action to prevent churning in their accounts is to stay aware of all activity in their portfolios and maintain the appropriate perspective. After all, investment advisors, by and large, are professionals. Brokers are expected to adhere to FINRA and SEC rules for legal and ethical trading; in addition, member firms have an obligation to supervise brokers to help identify potential churning. It’s not so much the day-to-day buying and selling that’s going to be a warning sign as much as long-term trends. Percent changes are typically reviewed on an annual basis when determining whether churn is happening.

That being said, it’s important to recognize if the pace of transactions in your accounts has changed recently. This may be in response to favorable market conditions or it may be a sign of excessive trading. Do all of these purchases and sales fit your goals? Has your tax liability increased suddenly without a commensurate increase in your profits? These can be important questions to ask yourself and your investment advisor if you have concerns about how the trading activity is affecting the performance of your portfolio. Consult with the broker-dealer and FINRA in filing a complaint if necessary, and realize that you may have legal recourse, too. Excessive trading isn’t just unethical, it’s illegal.

The Wolper Law Firm, P.A. represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Matt Wolper, the Managing Principal of the Wolper Law Firm, P.A., is a trial lawyer who has handled hundreds of securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at 800.931.8452 or by email at mwolper@wolperlawfirm.com.