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What Is Churning, And What Are Its Warning Signs?

Your financial adviser is supposed to be looking out for your best interests. But what if this doesn’t happen? While most financial advisers act appropriately, there are bad apples out there who may decide to engage in conduct that disregards their clients’ interests and is instead aimed at padding their own pockets.

One such form of conduct is churning. Churning occurs when a financial professional who has the authority to make investment decisions regarding a client’s account engages in excessive securities trading with the primary aim of generating more commissions.

Churning can be very damaging to an investor. For one, it can drain his or her assets through excess commissions. Also, any time an adviser makes investment decisions for a client with anything other than the client’s best interests in mind, there is the potential for the client to be exposed to financial harm.

So, investors may want to keep an eye out for red flags of churning. Here are some things that could be warning signs of churning:

  • An adviser engaging in frequent buying and selling when it comes to a securities portfolio
  • An adviser, out of the blue, suggesting more or different securities products than he or she usually does
  • An adviser refusing to provide explanations of a trade-heavy investment strategy

How To Respond To Churning

People can fire financial professionals whom they feel they can no longer trust to serve their best interests.

Also, legal action may be a possibility. Churning is against the law, and there are legal routes available to victims of this misconduct to pursue compensation for the financial harm they suffered. Whether an investor has a strong churning claim depends on a range of factors. Skilled securities law attorneys can advise investors who suspect they are churning victims on their options.

How An Attorney Can Help In Churning Cases

An attorney’s assistance is vital if you have been victimized by your broker’s churning. For one, they can scrutinize your brokerage account for evidence of excessive trading. In doing so, they, with the help of experts, will look at key metrics, such as your account’s turnover ratio – the yearly frequency with which your broker trades your assets – and cost equity ratio – the percentage of profit your account would need to earn to break even. If your attorney finds your account has a turnover ratio of six or higher and a cost equity ratio of 20% or more, these are likely indicators of churning. However, a turnover ratio as low as one or two and a cost equity ratio as low as 15% or 20% can still indicate trouble.

Furthermore, an attorney can use their findings to mount a strong defense on your behalf. Brokers may try to hide behind the cover of market fluctuations or investment strategies gone awry. Having the legal support – and the data – you need can help counter their claims.

Call Us If You Are A Victim Of Churning

We can help you if you have been financially harmed by your broker’s excessive trading. To discuss your churning case with one of our securities law attorneys, call 866-617-6209. Alternatively, you can set up your appointment online.