February 13, 2015
What is churning and why should you care? Hint: It has nothing to do with butter!
What is churning and why should you care? Hint: It has nothing to do with butter!
Churning is when a broker sells stocks in a portfolio to get commissions. He is only selling for the sake of getting commissions from you when he is churning. He can say hes selling for your best interest but that is not true. Churning is illegal but very hard to prove, because there is always some reason they can use to justify there actions that it was exceptionable. To avoid churning avoid brokers all together. You dont need a broker who makes a living off of you buying and selling. You are better off with an index fund that does not have commissions.
In addition to what Garrett said, churning is difficult to recognize if you are unaware of it. Your broker will call you and tell you that he or she is looking out for you. They tell you they have reviewed your portfolio and believe another investment to be a better choice. They make you believe they are doing this for YOUR best interest. They say everything they can to make you believe that you should trade for your best interest, when in reality, they want you trade for THEIR best interest. These people are sharks. They are abusing their responsibility of trust with you and you should recognize this and fire them.
Churning is when a broker is excessively trading in their client’s account to generate commissions for themselves. It is an illegal and unethical practice, but very hard to prove because there is not a very good way to measure it other than a lot of buying and selling of securities that does little to meet their client’s investment objectives. Like the boys said, brokers will have many reasons to justify these movements of your securities which again, makes this very hard to prove. This is something you need to watch out for as an investor because it means you are losing money with each trade they make. One alternative could be to use a fee based account instead of a commission based account so that you can know your brokers objectives are in line with your best interest and not their own.
Well said, everyone. Let’s recap.
(1) Churning happens when a financial “helper” buys and sells often to increase the trading in your account, which in turn increases his commissions.
(2) It is illegal, but hard to nail down because that person can rationalize many reasons why the trades needed to be made.
(3) You can avoid churning by taking control of your account and kicking the “helper” to the curb. This will reduce your trades, reduce your taxes, reduce your costs, and ultimately, increase your returns over time. Winner, winner chicken dinner!