Is Your Broker Trading Your Account to Death? The Truth About Churning

Have you ever looked at your monthly brokerage statement and wondered why there are so many trades? Or maybe you’ve noticed that despite all the activity in your account, your balance keeps going down instead of up? If this sounds familiar, you might be a victim of churning – and it’s more common than you think.

Let me explain what churning is, how to spot it, and what you can do about it if it’s happening to you.

What Is Churning, Exactly?

Churning is when your broker makes excessive trades in your account primarily to generate commissions, not to benefit you. Think of it this way: every time your broker buys or sells something in your account, they get paid. So some unscrupulous brokers will trade frequently just to rack up those commission payments.

It’s like having a mechanic who keeps finding new things “wrong” with your car every time you bring it in. Sure, they’re doing work, but they’re doing it to benefit themselves, not you.

How to Spot Churning in Your Account

Here are the warning signs I tell my clients to watch for:

Your account is constantly active – If your broker is buying and selling investments every few weeks or even every few days, that’s a red flag. Most long-term investment strategies don’t require constant trading.

Your returns don’t match the market – If the stock market is up 10% for the year but your account is flat or down, excessive trading costs might be eating up your gains.

Commission costs are eating you alive – Look at your statements. If you’re paying hundreds or thousands of dollars in commissions each month, that’s a problem.

Your broker can’t explain the strategy – Ask your broker why they’re making so many trades. If they give you vague answers or change the subject, be suspicious.

You’re always “rebalancing” – While periodic rebalancing makes sense, doing it every month is usually unnecessary and expensive.

The Real Cost of Excessive Trading

Here’s what many investors don’t realize: every trade has costs beyond just the commission. There are bid-ask spreads, market impact costs, and tax consequences. These can add up to serious money.

I had a client whose broker made over 200 trades in a single year in an account worth $300,000. The commissions alone were over $15,000, but when we calculated all the costs, the excessive trading cost him nearly $40,000 in one year. That’s money that should have been growing for his retirement.

Different Types of Churning

Classic churning – This is the obvious kind where your broker is constantly buying and selling stocks, bonds, or mutual funds.

Mutual fund switching – Your broker keeps moving you from one mutual fund to another, generating new sales charges each time.

Variable annuity churning – Moving money between different variable annuities or making unnecessary exchanges within annuities.

Options churning – Excessive options trading, especially complex strategies that generate multiple commissions.

Why Brokers Do This

Let’s be honest about the incentives here. Many brokers are paid based on how much they trade, not on how well your investments perform. This creates a conflict of interest – what’s good for their paycheck might not be good for your portfolio.

Some brokers justify excessive trading by claiming they’re “actively managing” your account or “taking advantage of market opportunities.” But here’s the truth: study after study shows that frequent trading usually hurts returns more than it helps.

How to Prove Churning

If you suspect churning, here’s what you need to document:

Calculate your turnover ratio – This measures how often your entire portfolio is traded each year. A turnover ratio above 3-4 times per year is often considered excessive.

Track your commission costs – Add up all your trading costs for the year. If they’re more than 2-3% of your account value, that’s probably too much.

Compare to benchmarks – How did your account perform compared to a simple index fund? If the index fund did better after accounting for costs, excessive trading might be the culprit.

Document the broker’s explanations – Keep records of what your broker told you about why they were making trades.

What You Can Do About It

First, stop the bleeding – If you suspect churning, tell your broker to stop making discretionary trades. Put it in writing.

Get a second opinion – Have another financial advisor review your account activity. Sometimes an outside perspective can spot problems you might miss.

Calculate your damages – Figure out how much the excessive trading cost you. This includes commissions, lost returns, and tax consequences.

Consider legal action – Churning is a violation of securities laws. You might be able to recover your losses through FINRA arbitration.

How to Prevent Churning

Understand your broker’s compensation – Ask how your broker gets paid. Are they paid per trade or based on your account’s performance?

Set clear expectations – Tell your broker you prefer a long-term, buy-and-hold strategy unless there’s a compelling reason to trade.

Review statements carefully – Don’t just file away your monthly statements. Actually read them and question any activity you don’t understand.

Ask before every trade – If your broker has discretionary authority, consider revoking it and requiring them to get your approval for each trade.

When Churning Becomes Fraud

Churning isn’t just bad advice – it’s securities fraud. If your broker is making excessive trades primarily to generate commissions, they’re violating their duty to put your interests first.

The good news is that if you’ve been a victim of churning, you have legal options. FINRA arbitration is specifically designed to handle these types of disputes, and many churning cases result in significant recoveries for investors.

Real-World Example

I represented a retiree whose broker convinced him that “active management” was necessary to protect his nest egg. Over three years, the broker made over 500 trades in an account that started at $800,000. The commissions and fees totaled over $60,000, and the account value dropped to $650,000 despite being in a bull market.

We were able to prove that a simple index fund would have grown to over $1 million during the same period. The client recovered $400,000 through FINRA arbitration.

The Bottom Line

Your broker should be working to grow your wealth, not to generate commissions. If your account looks like a revolving door of trades, it’s time to ask some tough questions.

Remember: good investing is usually boring. If your account is constantly active, that’s not necessarily a sign of good management – it might be a sign that your broker is putting their interests ahead of yours.

If you suspect you’ve been a victim of churning, don’t wait. The evidence can disappear over time, and there are deadlines for filing claims. Get professional help from an experienced securities attorney like investment fraud lawyer Robert Pearce who can evaluate your case and help you recover what you’ve lost.

Your financial future is too important to let an unscrupulous broker trade it away for their own benefit.