When Good Isn't Good Enough
Churning
In the context of stock trading and investing, “churning” refers to a practice where a stockbroker or financial advisor engages in excessive buying and selling of securities (such as stocks, bonds, or other investments) in a client’s account, primarily for the purpose of generating commissions or fees for themselves. Churning is unethical and illegal, as it prioritizes the broker’s financial gain over the best interests of the client.
Key characteristics of churning include:
- Excessive Trading: Churning involves frequent and unnecessary trading within a client’s account. The broker may make numerous transactions, often without a legitimate investment rationale, solely to generate commissions or fees.
- High Costs: As a result of frequent trading, clients may incur substantial transaction costs, including brokerage commissions, bid-ask spreads, and taxes, which can erode their investment returns.
- No Consideration of Client Objectives: Churning usually ignores the client’s financial goals, risk tolerance, and investment objectives. Instead, it focuses on maximizing the broker’s compensation.
- Failure to Disclose: Brokers engaging in churning often do not disclose their motives or the adverse impact on the client’s portfolio.
Churning is prohibited by securities regulators, such as the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Investors should be aware of their rights and closely monitor their investment accounts to detect any signs of excessive trading or churning. If you believe your account has been churned, please contact Banks Law Office today.