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What is investment churning?

On Behalf of | Feb 22, 2024 | Securities Law And Litigation |

When someone hires an investment firm or a financial advisor, they want that person to put their best interests first. The individual who is investing may believe that they don’t have the proper knowledge to maximize their investments. They do have the capital, but they need a professional to help them make the right decisions. That’s why they’ve hired the investment firm in the first place.

However, these professionals are sometimes paid for every trade that they make. This could be a flat fee, such as getting five dollars for each trade, or it could be based on a percentage. The payments are set up this way because they directly pay the financial advisor for the work that they’re actually doing. If they pay attention to the client’s portfolio and make alterations to ensure that it maximizes their investment, then they earn more money – and so does their client.

The problem with churning

Investment churning, however, is when the firm or advisor begins making trades just to get that commission. Maybe it would have actually been best for the client to leave their money in the stocks they already owned. But the advisor makes 10 different trades just to generate 10 commissions. In the end, the investment portfolio does worse or stays the same. It’s clear that the advisor was only thinking about their own financial gain and not the success of their client.

Situations like this can lead to serious legal accusations and complications. With a lot of money on the line, the stakes can be significant. Those who are involved need to be well aware of all of the legal options at their disposal and the steps they can take to protect their rights.

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