What is Reverse Churning by an Investment Advisor?
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Churning and Reverse Churning: Unethical Practices in the Securities Industry
Churning and reverse churning are two sides of the same coin, both representing unethical practices in the securities industry that prioritize the broker’s or advisor’s interests over the client’s best interests. Unfortunately, both have an uncanny ability of showing up alongside advisors and financial professionals engaging in Investment fraud.
Churning
Churning refers to the excessive buying and selling of securities by a broker for the primary purpose of generating commissions rather than acting in the best interest of the client. This practice is detrimental to the client as it incurs unnecessary trading costs and potentially exposes the client’s portfolio to unnecessary risks.
Reverse Churning
Reverse churning, on the other hand, is the opposite scenario where little to no trades are executed in an account, but the client pays fees because they are being charged an annual fee instead of commissions. This practice can only occur in fee-based accounts, where the client pays a fixed fee or a percentage of assets under management, regardless of the trading activity.
Reverse churning violates several securities industry rules and regulations, including:
- The SEC’s Regulation Best Interest (“Reg BI”) requires advisors to act in the client’s best interest and not place their own interests ahead of the client’s.
- Reg BI and the Investment Advisers Act fiduciary standard require advisors to consider costs when recommending an account type.
- FINRA rules prohibit placing clients in fee structures that result in higher costs than alternatives offering the same services.
Consequences and Enforcement Actions
Both churning and reverse churning are considered unethical practices that prioritize the financial interests of the broker or advisor over the client’s best interests. The SEC and FINRA have taken enforcement actions against firms for these practices, including requiring restitution to clients and imposing civil penalties.
To protect investors, it is crucial for brokers and advisors to adhere to the highest ethical standards, prioritize their clients’ interests, and provide transparent and cost-effective investment solutions tailored to each client’s unique needs and objectives.
Protecting Yourself from Churning
At our firm, we believe that knowledge is power. By educating yourself on the intricacies of the financial industry and your rights as an investor, you can take proactive steps to protect your investments. Our team of dedicated professionals is committed to providing you with the resources and guidance you need to make informed decisions.
If you suspect that you have been a victim of churning or any other form of misconduct, do not hesitate to seek legal assistance. Our experienced securities attorneys are here to advocate for your rights and ensure that your interests are protected.
Our lawyers are nationwide leaders in investment fraud cases.
Take Action Today
Safeguarding your investments is not a passive endeavor; it requires vigilance, knowledge, and a willingness to take action when necessary. We stand ready to support you on this journey. Contact us today at 866-938-2021 or visit investorclaims.com to schedule a confidential consultation and take the first step towards securing your financial future.
Written By: Courtney Werning
Recovering Losses Caused by Investment Misconduct.