By Kristina Ludwig, Fall 2014 Student Intern
I Can’t Believe It’s Not Butter!
In the finance world, “churning” has nothing to do with butter and everything to do with a claim in securities arbitration. Churning occurs when a broker or financial adviser excessively buys and sells investments in a customer’s account for the adviser’s own gain. A commission-based financial adviser receives a fee, or commission, for every investment bought and sold in a customer’s account. An adviser more focused on the transactions he can create to get a bigger paycheck is not looking out for his client. When an adviser puts his needs before the client’s and turns an excessive profit at the client’s expense, he has engaged in unethical behavior and the client may be able recover what he lost due to the adviser’s actions.
According to The Practitioner’s Guide to Securities Arbitration by Jason Doss and Richard Frankowski, to establish a claim for churning, the client needs to prove three things:
- The trading in his account was excessive when compared to his investment objectives;
- The adviser had control over trading in the account;
- The adviser either intended to defraud the client or recklessly disregarded the client’s interests.
So if your financial adviser is buttering you up with the idea of excessive investment trading and it seems out of line with your investment objectives, speak up! For more information on churning visit the SEC’s website here or check out prior posts on the topic on our blog here.