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You may have lost money in your investment portfolio,
due to mismanagement and not even know it.

What is churning and why is it important to me

While brokerage firms provide helpful and important services for investors, their end goal is to make money. Not just for investors, but for the business itself. Indeed, brokerage firms have expenses just like any other business. As such, part of the profits they realize go back into the business. The other part goes into brokers’ pockets.

There’s nothing wrong with making money honestly, but when there are direct and calculated actions to artificially create work to generate commissions, this is not allowed. Such actions are called churning. This post will briefly detail what churning entails.

At its core, churning is about generating excessive trades motivated by a broker’s desire for commissions. Whether activity on an account is deemed to be churning depends on several factors, including:

Turnover rate – This is measured and identified through frequent in and out trading and the commissions that are generated through such activity.

Cost equity ratio – This contemplates the rate of return (i.e. the break even point) for particular trades as measured by the commissions earned by the transactions compared to the benefits realized on the account.

Control over the account – To be liable for churning, a broker must be in control of an investment account. The control can be actual or de facto considering the relationship the broker has with the client and his or her subordinates.

Ultimately, churning can be a cause of action by itself or be brought in conjunction with a breach of contract action. If you have additional questions about investment fraud, an experienced securities law attorney can help. 

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