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What Is Churning?

Simms Law, P.C. June 14, 2022

Investment advisors, brokers, and other financial professionals have a duty to act in the best interests of their clients. Unfortunately, however, certain individuals involved in the financial industry sometimes attempt to enrich themselves at their clients’ expense. This is known as securities fraud. Securities fraud is a broad term that encompasses several unethical and illegal practices. One such practice is called churning. Churning occurs when a broker excessively trades a customer’s account solely to generate commissions. If you believe you are a victim of churning, please review the information below and contact our Florida investor representation attorney as soon as possible to discuss your case. 

Different Types Of Churning

The most common type of churning occurs when a broker makes excessive stock or bond trades. This excessive trading generates commissions for the broker while providing minimal benefit to the investor. However, churning isn’t limited to stocks and bonds alone.  Brokers also churn annuities, mutual funds, and life insurance policies. 

Common Warning Signs Of Churning 

Common signs of churning include:

  • Frequent trading confirmations – Brokers must send investors written confirmation of all securities transactions. Unless you are an active trader, you shouldn’t receive daily or weekly trading confirmations. Frequent confirmations are a sign that your broker may be overtrading your account. This is especially true if you haven’t signed a document giving your broker permission to trade in your account, and your broker isn’t discussing trades with you before their execution.

  • Frequent mutual fund and annuity activity – Mutual funds and annuities are long-term investments that shouldn’t generally be traded for other mutual funds and annuities. The sale of these kinds of investments shortly after they were purchased is often done to maximize broker commissions. If a broker sends you a form requesting that you trade a mutual fund or annuity, always proceed with caution. 

  • Account results that are inconsistent with market performance – If the market is moving upward, but your account appears to be performing poorly, then it may be due to commissions resulting from excessive trading by your broker. Generally, good market performance should have a positive effect on your investment account. 

Are You a Victim of Investment Fraud? Let Us Help!  

At Simms Law, P.A., we understand the devastating and life-changing effects that financial fraud can have on investors. This is why one of our primary focuses is the representation of investors who have been the victims of churning and other forms of financial fraud by brokers and other financial professionals. At Simms Law, we take your concerns seriously, and we are fully prepared to fight for you in both litigation and FINRA arbitration. Therefore, if you suspect that any suspicious activity has occurred in any of your investment accounts, or if you believe that you have been misled about the nature and risks of any of your investments, please contact us today for a free consultation.