Active Brokerage Accounts. When should you be worried?
The phrase “active” brokerage account carries varied visions with it in the mind of the account holder. What constitutes an active account to one investor, which is what he or she has asked for, may be an abusive use of control, by an account executive, of another. Thus, the purpose of this post is to provide the reader with some general educational information concerning this issue. Please keep in mind that the information provided herein is not designed to be complete in all material respects. Consequently, if you have any questions concerning its content, you should contact a qualified professional.
The issue of control and the type of damages that relate to active accounts which culminate in broker/dealer mismanagement and a claim of churning is discussed in another part of our website and can be reached by following this link: http://www.forkeylaw.com/Securities-Commodities-and-Precious-Metals-Terms/Churning-Activity.shtml
In this post, we are going to provide you with two well recognized formulas that you can use as an empirical tool to take the first step to see if you believe that there has been excessive activity (churning) in your account.
The first is the “Turn-Over Ratio.” How often is the net equity in your account turned over. Typically, turn-over is usually calculated on a 12 month basis. This is determined by use of the formula: total Purchases divided by average monthly equity and then annualized by the number of months involved.
The second method is the “Cost-Equity Ratio.” This formula takes total commissions and divides that number by average equity and than annualized that number.
The higher these numbers are, the more you should be concerned. While these formulas may provide the reader withth some guidance as to whether or not the activity in your account was excessive, there are many other factors that should be taken into consideration to see if you were subject to broker mismanagement and abuse, which would require you to consult with a qualified professional.