In most brokerage accounts you are charged a commission each time you buy or sell a security (stocks, bonds, etc.). Churning occurs when a stockbroker buys or sells securities in your account for the primary purpose of generating a commission, rather than because the trade makes financial sense for the investor. Doing so violates securities industry rules, brokerage firm rules, and legal obligations owed to the investor. In short, brokers churn accounts in order to put extra income in their pockets, at the expense of the investor.
The commissions generated from excessive trading can make it difficult for an investment portfolio to be profitable, and contravenes the principle that the investors’ interests should first.
According to FINRA, “A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.”
Tips to avoid churning of your portfolio:
- Maintain control over your portfolio and require your authorization before any transaction.
- Review each trade confirmation and your monthly account statements and seek and independent review of your account if you see frequent buys and sells of securities.
- Consider using a fee-based account instead of a commission-based account.
Call a Los Angeles Securities Lawyer Today
If you believe you have been a victim of churning, you may have certain legal rights that require your immediate attention. Contact an experienced Los Angeles securities lawyer as soon as possible to discuss your rights.