If you give your broker complete discretion to buy and sell stocks, annuities, mutual funds or other investment instruments because they’re the expert and you’re not, you’re taking some big risks with your money. Most brokers are law-abiding, ethical professionals. Some, unfortunately, are not.
Let’s look at something called “churning.” That term refers to a broker conducting excessive trades for a client in order to generate money in commissions for themselves. It’s not only unethical, but it’s also a violation of federal securities laws. Those found guilty of churning can face fines of as much as six figures, as well as sanctions by the Financial Industry Regulatory Authority (FINRA), including potentially being barred from working in the industry.
How do you know whether a broker has been churning or they’re just making a number of trades to try to make money for you? One key indicator or churning is that the trades aren’t beneficial to you or are harming your portfolio. If churning isn’t caught, an investor could potentially lose a good deal of money. Even if the excessive trades are profitable, they could end up owing a considerable amount in taxes.
The best way to help ensure that you don’t become a victim of churning is not to give your broker (or any financial professional) the authority to make transactions for you without your approval. By maintaining full control your investments, you prevent all sorts of unethical, unwise and illegal activity that can seriously harm your financial future. If you believe you’ve already been the victim of churning or other illegal activity, talk with an experienced attorney.