With commission based accounts, brokers make a commission or fee every time they trade a stock. Some unethical brokers may engage in an activity known as “churning.” Churning occurs when a broker engages in excessive trading designed to pad their bottom line while doing nothing for and on most occasions harming their clients.
It’s a broker’s job to recommend suitable trades. In the case of churning, engaging in excessive trading places the Broker’s interest ahead of his client and is not suitable for anyone.
It’s important to be aware of the warning signs of churning. Keeping an eye out for red flags can help you know whether your broker is engaging in typical trading or may be taking advantage of you.
Proceed with caution
You should be wary if:
- Your broker is engaged in making an atypical number of trades
- Your broker is suddenly suggesting the purchase of a large number of securities products
- Your broker is refusing to explain a trade-heavy strategy
To make a successful claim for churning, you must show that your broker had control of your investment. You must then confirm that your broker was engaged in “excessive” trading. This can be accomplished through calculating cost-to equity ratio’s and turnover ratios. Remember, what may be considered excessive in one context may be the accepted course of doing business in another.
If you suspect your broker is churning your investment, you can always fire your broker. If you suspect you have suffered a financial loss as the result of churning, you may wish to explore possible legal remedies. A skilled professional can help inform you of your options and provide you with the information you need to take the best path forward.