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Has your brokerage account been churned?

On Behalf of | Sep 1, 2021 | FINRA |

When Pennsylvania residents choose a financial advisor, they hope that person will act in their best interests. People are often advised to look for a fiduciary, but even that category has become clouded with the emergence of hybrid fiduciary financial advisors. Whoever your financial professional is, you should be aware of the issue of account churning.

Understanding the problem

Churning is a practice where brokers perform excessive trades that benefit them more than their clients. This is a particular problem when brokers are compensated through commissions. Although trading is necessary for clients to make money in the marketplace, churned accounts tend to have far more trading activity than is typical.

Many investors agree that the best policy when it comes to the market is buying and holding. They expect to engage in a moderate level of trading. Investors who want to pursue a more aggressive, riskier strategy usually advise their advisor of that. In fact, many brokers won’t pursue an aggressive investing strategy without authorization. However, it can be normal for investors to see several trades in their account every month.

How to identify churning

More than about 10 trades per month can be a warning sign that something unusual is going on. Another indicator would be an account that is seriously under-performing in a strong market.

Every brokerage is required to notify account holders of transactions that are performed on their behalf. It’s a good idea to review these account statements when they arrive and note the performance of your account and number of trades.

What to do about churning

People do have access to recourse if they believe their account has been churned. They can make a FINRA claim or reach out to a legal professional for help. To make a successful claim, it’s important to show that the broker took control from the client in an inappropriate way. Showing intent is also important.

When it comes to investing, it’s important to educate yourself and review your accounts closely. Doing so can make you aware of any inappropriate behavior.


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