Churning

A broker has a duty to put the interests of the client first. He can not engage in trades that are designed to generate commissions for the broker rather than to the benefit the client’s account. A broker has an incentive to increase the volume of transactions when he is compensated on the volume of transactions conducted for the client. The practice of engaging in trading activity which is excessive in light of the objectives and resources of the client's account is called churning.

Churning or excessive trading happens when a stockbroker buys or sells stocks or other securities for the primary purpose of generating commissions rather than because the trades make financial sense for the investor. The commissions associated with the trading can make it difficult or nearly impossible for your account ever to be profitable. If you suspect that your account assets have been eroded by churning, or if frequent sales of profitable or “winning” stocks have disguised poor overall performance in your portfolio.

In a churning case, our analysis of the broker’s trading in your account often will show that your broker sold your profitable investments quickly and that your broker held onto losing investments. The frequent gains realized when profitable investments were sold created the illusion that your portfolio was performing well. Unfortunately, the stocks and bonds that were losing money often were left to languish in your account.