What Is Reverse Churning?

When you pay an investment firm or financial advisor a flat fee to manage your money, and they do little or nothing with your account, this may be characterized as reverse churning. With reverse churning, you are essentially paying your financial advisor a fee and getting very little services in return. If your brokerage firm fails to manage your money properly, you can file an investment fraud arbitration or lawsuit, depending on all the circumstances.

At Meyer Wilson, we have a long history of handling a wide range of investment misconduct cases. Our experienced team of investment fraud lawyers has extensive experience with reverse churning cases and will use every resource at our disposal to recover compensation on your behalf.

Churning Vs. Reverse Churning

When you invest your money with a brokerage firm or financial advisor, you will need to choose whether to invest in a commission-based or a a fee based on the amount of your assets they will be managing. Unfortunately, both types of accounts can be subject to various forms of securities fraud.

With a commission-based account, your financial advisor may engage in churning, where they make excessive transactions with your money to rack up their commissions. Meanwhile, with a fee-based account, your advisor may fail to take any action with your account and simply take their fee off the top.

Commission-Based Accounts

With a commission-based account, investors pay their brokerage firm a fee for every transaction they perform. This can be a good option if you don’t desire frequent trading in your account. However, if you are hands-off with your account and relying on your financial advisor to manage your money properly, you can become a victim of churning.

With churning, your advisor makes excessive trades with your money simply to rack up more commissions.

Flat-Fee Accounts

With a flat-fee account, investors pay an annual flat fee to their financial advisors that is typically assessed as .25% to 2% of their total investment. Flat-fee accounts can be good for investors who make frequent trades. However, if you don’t closely monitor your account, your account may fall victim to reverse churning.

With reverse churning, your advisor does little or nothing with your money and collects their fee without doing any work.

Maintain Control Over Your Investment Account to Avoid Reverse Churning

The best way to avoid reverse churning is to keep control over your account and approve or disapprove any decisions regarding the buying and selling of your assets. You should make the level of activity you expect for your portfolio clear to your advisor from the outset and inform them if you would like to change the level of activity on your account.

The level of activity you desire will help determine whether it is in your best interest to open a commission-based or a flat-fee account.

Flat-Fee Accounts and Reverse Churning Are on the Rise

In addition to reverse churning being illegal, it is also unlawful for brokerage firms and financial advisors to push a specific account type on their clients. However, they can advise their clients about which type of account may be in their best interest.

In recent years, the number of flat-fee accounts has risen dramatically, as has reverse churning. Of course, in addition to suggestions by financial advisors to choose flat-fee accounts, dishonest advisors who are likely to engage in reverse churning will not shy away from pushing their clients in this direction.

While a flat-fee account can be in your best interest, it is important that you fully understand your situation and how these accounts are handled to ensure you are making the right decision with your money and prevent predatory financial professionals from taking advantage of you. An experienced lawyer can help you sue your financial advisor if reverse churning does occur.

Take Action if You Suspect Reverse Churning

Most investors are not aware of the intricacies of the market. Unfortunately, that means that they are at a significant risk of falling victim to reverse churning and other investment fraud scams. Without a basic understanding of how investments should be handled properly, fraud can be very difficult to identify.

If you have any suspicions that your financial advisor or investment firm is mishandling your money, you should reach out to an experienced investment fraud lawyer for help. If you see very little or no movement in your account, your broker may be neglecting your account, and they may be guilty of reverse churning.

Of course, with little movement, there is always the possibility that the assets you are currently invested in are performing reasonably well and your advisor is managing your investments in your best interest. An experienced lawyer can help tell the difference between reverse churning and a strategic hold in a particular investment and help get you a positive case result.

Get Help From an Experienced Reverse Churning Lawyer to Recover the Money You Deserve

If you suspect that you were the victim of reverse churning, you should reach out to an experienced reverse churning lawyer as soon as possible. You only have a limited amount of time to take legal action, and any delays can result in the loss of your right to recover damages. An experienced lawyer can help you file a lawsuit to recover damages.

At Meyer Wilson, we have spent the last 25+ years helping thousands of clients recover compensation in investment fraud cases. Our experienced team has secured over $350 million for our clients. Contact us for free by giving us a call or completing our online contact form today to set up a free case evaluation.