Most stockbrokers and investment advisers are paid based on a percentage of the value of trades of the investments in your portfolio. (This does not apply to brokers who trade “managed accounts” or who are paid based on the total assets in an account.)
When stockbrokers are paid commissions, these amounts are deducted from your investments. Therefore, it follows that the more trades made by such brokers, the more they earn. Honest brokers, who function for your best interests, will make or recommend only trades which are necessary to maximize the performance of your holdings.
However, when paid based on your trades, there is a temptation fordishonest brokers to try to earn extra money by making more trades, even if this is not the best strategy for your portfolio. “Churning” is the excessive buying and selling of stocks or other investments motivated by the broker’s desire to increase commissions as opposed to your best interests. This excessive trading is unethical, a violation of securities law, and may give you the right to seek compensation from your broker. In addition, excessive trading of your holdings may be illegal even if it was not motivated by your stockbroker’s desire to increase commissions.
Evidence of improper trading can show up in different ways:
- First and foremost, unless you gave your broker discretion to make trades without your permission, there should not be any unauthorized trades on your statement. Unauthorized trades are wrongful even if they do not rise to the level of churning;
- Even if you gave your stockbroker discretion with regard to your portfolio, generally, or even specific stock trades, this does not mean that they can execute trades for their own, as opposed to your, best interests. While there is no strict formula which will tell you if your broker churned your account, you should consult with an expert on securities law if you think there are excessive trades in your account, especially if the same or similar stocks were frequently bought and sold;
- Finally, if your broker has pressured you into frequent trades for reasons you did not completely understand, he or she could still be responsible for churning if it can be shown that the trades were motivated by the stockbroker’s desire to maximize commissions as opposed to do what was best for your portfolio.
Stockbroker Fraud and Securities Fraud
A trusted adviser with expertise on these issues, such as an attorney experienced in stockbroker fraud and securities fraud, can help you to determine whether or not you might have a claim against your stockbroker. They will need to review your account statements to determine the frequency and volume of trades and whether the trades were logically related to your investment goals. The attorney may consult with an accounting expert to evaluate the case, and figure out what can be proved with regard to your “damages” – meaning the amount you could recover, including any losses to your portfolio resulting from the unauthorized trades and the commissions paid to your broker as a result of improper trades.