What is Reverse Churning?
Reverse churning occurs when a broker inappropriately charges the investor a fee to maintain a fee based advisory account. Typically, the fee is expressed as an annual percentage charged to the entire account balance. Reverse churning is becoming more common as brokerage firms search for new methods of generating profit from accounts that would otherwise not produce revenue.
What Type of Investment Account Should I Maintain?
Brokerage firms typically offer two types of investment accounts, commission-based accounts and fee based advisory accounts. Investors should maintain the type of account that best meets their interests.
Commission-based accounts are suited for infrequent traders who tend to purchase and hold securities for long periods. Their accounts do not need ongoing management. Their portfolio is static. Fee based advisory accounts are suited for investors that require ongoing advice and monitoring of their portfolio.
Your investment advisor may discuss the type of account best suited to your needs. Further, your investment advisor may recommend that you switch account types. It is important to consider whether a need actually exists to switch form a commission-based account to a fee-based account.
When Can I Sue my Broker for Churning?
In a fee based advisory account, or wrap account, the brokerage firm collects a flat fee for investment advice or a percentage of assets under management. This differs from a commission-based account, where the brokerage firm only receives payment upon conducting a transaction of a financial product, such as the purchase or sale of a stock.
Churning occurs when a broker buys or sells investments in a customer’s commission-based account for the purpose of generating excessive commission. Here, the investor has a claim against the broker for churning. The investor may be entitled to recover for a decrease in their portfolio’s value, the excessive commissions paid, and accrued interest.
Although the occurrence of frequent turnover in a commission-based commonly indicates that the investor may have a churning claim, this is not the case in fee based advisory accounts. Frequent turnover in fee based advisory accounts is not considered to be churning since no commission is generated in those transactions. Thus, investors who maintain a fee based advisory account are not able to sue their brokers for churning.
However, investors who maintain fee based advisory accounts may have other claims against their broker.
My Broker Recommended I Switch from A Commission-Based Account to a Fee Based Advisory Account, Do I Have A Reverse Churning Claim?
It is not enough to ensure that the fee based advisory account investor is a high-volume trader. The broker must also provide ongoing management and advice.
What are Common Reverse Churning Indicators?
Although reverse churning is deceptive and difficult to spot, investors should look out for several of the following practices that commonly indicate a claim. The occurrence of double dipping is common in reverse churning claims. Here, the broker generates significant commissions with a client’s brokerage account and then moves that client into an advisory account to collect the additional fee-based fees.
Second, brokers who inappropriately enroll investors in fee based advisory accounts may be liable for reverse churning. If the broker enrolls the investor in a fee based advisory account, the broker must be able to explain his or her trading philosophy or investment strategy. Typically, a fee based advisory account is not suitable for low-volume accounts.
Finally, reverse churning claims commonly arise when the broker is not earning the advisory fee. Enrollment in a fee based advisory account means that the broker is required to provide the investor with investment advice and take actions that justify the fee. An investor who pays an advisory fee for an inactive broker likely has a reverse churning claim.
Is the Brokerage Firm Also Liable for Reverse Churning?
Yes, the brokerage firm has a duty to review and investigate. If your broker enrolls you into an fee based advisory account, the brokerage firm must review the practice shortly after the transition and supervise the broker. The firm’s investigation must reverse the enrollments of any low-volume activity accounts into fee based advisory account structures.
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Astanehe Law Knows Reverse Churning
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