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Is My Financial Advisor Buying and Selling Securities to Increase Commissions?

by | Jul 29, 2020 | Firm News |

Many financial advisors receive commissions from trades they place on behalf of their clients. When financial advisors or brokers engage in excessive trading solely or primarily for the purpose of generating commissions, they are engaging in “churning.” Churning violates federal and state securities laws and can often cost clients thousands of dollars.  Additionally, churning may also subject the client to adverse tax implications.

Churning and excessive trading can be hard to identify. Reviewing a year’s worth of statements is typically needed to determine whether churning has occurred in an investment account. Signs of churning may include the repeated buying and selling of the same or similar securities multiple times per month.  Another valuable tool in determining whether an account is being churned is calculating the account’s “turnover ratio.” The turnover ratio is the total value of purchases made in an account annually divided by the account’s average balance. A turnover ratio of four (4) or more typically indicates churning or excessive trading.

For example, if an investment account has an average value of $100,000, and the financial advisor managing the account purchases a total of $500,000 in securities during one year, the turnover ratio would be five (5), which would indicate churning may be occurring in the account. It is important to note, though, that churning may occur at any level.  The threshold issue is whether the transaction’s primary purpose is to generate a commission. Additional information about churning may be found here.

If you believe your investment or retirement account was churned or improperly traded, contact Devin Bone today to discuss your potential remedies. For a free consultation, call Devin at 248-782-7755 or complete our online contact form to set up a consultation.