Churning, Excessive Commissions and Fees

"Churning" is a form of securities fraud that involves excessive trading by a stockbroker in order to maximize commissions. Churning is established by analyzing the trading patterns and activity in the customer's accounts. A typical churning analysis usually involves calculating the annualized turnover ratio and the cost equity maintenance ratio (CEMR).

In addition to churning, a financial professional is also liable if they recommend a more expensive product or service than is necessary for the client when a less costly alternative is available. Many customers are understandably confused about the commissions, fees and costs charged by financial professionals. Financial professionals must adequately disclose the fees and costs associated with any products or services offered so that an investor can make an informed decision.

Examples of situations where firms have been found liable for excessive and unnecessary fees include:

  • Recommending that an investor with a long term buy and hold strategy convert their account to a managed account (known as a "wrap account") that charges a fee based on a percentage of assets under management when the customer would be better off under a commission-based arrangement.

  • Short-term trading or switching of mutual funds and variable annuities that earn the broker a commission and cause the customer to incur an early termination charge known as a contingent deferred sales charge (CDSC).

  • Failing to offer the customer commission discounts known as "breakpoints" associated with the purchase of mutual funds even though the customer is for the discounts.