Excessive Trading — Churning:
How can I tell if there is excessive trading in my account?
When reviewing your account statements, trade confirmations, or online account, look out for these red flags that may indicate excessive trading:
Unauthorized trading —– Be alarmed if you become aware of trades in your account that you did not authorize your broker to make.
Frequent trading — Be wary of frequent in-and-out purchases and sales of securities that don’t seem consistent with your investment goals and risk tolerance.
Excessive fees — Be suspicious if the total amount of fees seems high or if one segment of your portfolio consistently generates high fees.
Churning. A broker typically earns a portion of the commissions or other fees on each purchase or sale of securities that the brokerage firm makes for an investor. When a broker engages in excessive buying and selling (i.e., trading) of securities in a customer’s account without considering the customer’s investment goals and primarily to generate commissions that benefit the broker, the broker may be engaged in an illegal practice known as churning.
Be aware that excessive trading can occur even if the overall account value increases. Also, remember that your account statements, trade confirmations and online account do not disclose all fees — you can find more information by asking your broker. If you do not understand the reason for a trade or the reason for a fee, contact your broker and ask about it.
Communicating your investment goals to your broker. When you open a brokerage account, your broker should ask you to specify your overall investment goals (or “investment objectives”) and how much risk you are willing to tolerate. Different firms use different terms to describe investment objectives or risk-tolerance levels. Some common terms are: “capital preservation,” “income,” “growth,” “moderately aggressive,” “aggressive growth,” and “speculation.” Make sure that you understand what these terms mean and that you know what you communicated to your broker.
What should I do if I am informed of a high volume of trade activity in my account?
If your brokerage account has a high volume of trade activity, your brokerage firm may contact you and ask you to acknowledge the trading or to confirm that you are satisfied with how your broker is handling your account. If you receive such notification, you should ask your broker to explain:
1. The rationale for the broker’s recommended trading activity and investment strategy given your investment objectives
2. The total commissions or other transaction fees you have paid over the past month, quarter, or year
3. What percentage return on your investment you would need to break even on the fees you are paying
Once you have this information, you may want to speak with the broker’s manager or the firm’s compliance department to understand and to question the nature of the trading in your account in light of your investment goals and risk tolerance.
What should I do if I believe there has been excessive trading in my account?
Immediately contact a qualified professional.
Please keep in mind that the information contained herein is for educational purposes only. Thus, it is not complete in all material respects.
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