Most investors expect their financial professionals to recommend investment strategies that align with their financial goals, risk tolerance and long-term objectives. Unfortunately, not every broker acts in a client’s best interests.
Take, for example, one practice that has increasingly led to securities litigation in recent years: churning. Churning occurs when excessive trading is conducted primarily to generate commissions or other compensation rather than to benefit an investor.
Holding brokers responsible for churning
Churning can be difficult for investors to spot because buying and selling securities is a normal part of many investment strategies. However, frequent transactions that produce little or no meaningful benefit, especially when accompanied by substantial commissions or fees, may be cause for concern. Investors may notice unusually high trading activity, mounting transaction costs or declining account performance despite constant buying and selling.
The financial consequences of churning can be significant. Excessive commissions and transaction costs can steadily erode an investment portfolio, even during favorable market conditions. Investors may also lose opportunities for long-term growth when unnecessary trading replaces a disciplined investment approach.
Broker liability for churning often depends on several factors. Courts and regulators may examine, for example, the frequency of trades, the costs generated and whether the trading activity was consistent with the customer’s investment objectives.
Brokerage firms also have responsibilities. They are generally expected to supervise their registered representatives and maintain procedures designed to detect potentially improper trading activity. A failure to adequately monitor customer accounts or address warning signs may expose a firm to liability in certain circumstances.
If you suspect your account has been subjected to excessive trading, it is important to preserve account statements, trade confirmations and communications with your broker. These records can help establish whether the trading activity was appropriate or whether it may have been driven by improper financial incentives.
An experienced securities legal team can evaluate your account history, explain your legal options and pursue appropriate remedies when brokers or brokerage firms have caused financial harm through improper trading practices such as churning.