Churning & Excessive Trading: Is Your Broker Using Your Account as an ATM?
“Active management” is a term brokers love to use. It sounds sophisticated. It sounds like they are working hard for you—watching the market, pouncing on opportunities, and protecting your assets.
Sometimes, it’s true.
More often, it’s a mask for one of the oldest and most blatant forms of broker greed: Churning.
Churning is not “active trading.” It’s theft. It’s when your broker is buying and selling securities in your account with one purpose: to generate commissions for themselves.
Your financial goals, your risk tolerance, your tax consequences… none of it matters to them. The only goal is to hit “buy” and “sell” as many times as possible, because every time they do, they get paid. This practice is a direct violation of industry rules and a complete betrayal of your trust.
How We Prove a Churning Case
When we take a churning case to a FINRA arbitration panel, we aren’t just saying “this looks like a lot of trades.” We use a specific, two-part test to prove it.
Part 1: The Broker Controlled the Account
First, we must show that the broker was the one “calling the shots.” This can happen in two ways:
- Express Control (Discretionary Accounts): This is where you gave the broker formal, written permission to trade your account without your pre-approval on every trade. This makes proving a churning case much more straightforward.
- De Facto Control (Implicit Control): This is far more common. You may have had a “non-discretionary” account, but the broker used their authority as an “expert” to abuse your trust. This happens when the investor is unsophisticated, elderly, or simply trusts the broker’s advice and “rubber stamps” every recommendation.
If your response to their fast-talking calls was always “Okay, if you think that’s best,” you may not have had real control of your account. That control was in your broker’s hands, and they abused it.
Part 2: The Trading Was Excessive (The “Red Flags”)
Second, we use hard data to show the trading was not just “active,” but excessive and harmful. We look for two key metrics that arbitrators understand:
- Cost-to-Equity Ratio: This is the smoking gun. This number shows how much your portfolio would have to grow in a year just to pay for the broker’s commissions and fees. For example, a Cost-to-Equity Ratio of 20% means your investments had to gain 20% just to break even. This is an impossibly high bar and is immediate evidence of a churned account.
- Turnover Rate: This measures how many times your broker “turned over” or replaced all the assets in your portfolio. A turnover rate of 6 (meaning your entire portfolio was sold and replaced 6 times in one year) is often considered a red flag for excessive trading. When we see rates of 8, 10, or higher, it’s not a strategy—it’s a feeding frenzy.
The Excuses We’ve Heard Before
Brokers and their defense firms have a playbook of excuses. We’re ready for them.
- The Excuse: “But I gave you some winning trades! You can’t complain.”
- The Reality: This is irrelevant. A few lucky wins don’t excuse the dozens of other trades that were just generating fees. The violation isn’t about the outcome of a single trade; it’s about the pattern of excessive trading that put you at a disadvantage from the start.
- The Excuse: “But you approved every trade! I have it on a recorded line.”
- The Reality: This is the “rubber stamp” defense. They are trying to blame you for not being a financial expert. The law doesn’t expect you to be. When a broker withholds information, uses high-pressure tactics, or misrepresents the reason for a trade, that is not “approval.” That is de facto control.
A Modern Twist: “Reverse Churning”
The industry is smart. As many brokers moved from “commission” models to “fee-based” models (where you pay a flat 1-2% of your assets), a new abuse was born: Reverse Churning.
This is when your broker charges you that flat 1-2% “asset management” fee and then… does absolutely nothing.
They park your entire portfolio in a few mutual funds or, even worse, in cash, and let it sit there for years. They collect their fee every single quarter for doing zero work. This is also a violation. You are paying for “management” and receiving none.
Don’t Let Them Keep a Cent They Didn’t Earn
Your investment account is your future. It’s your retirement, your family’s security, or your life’s work. It is not your broker’s personal expense account.
If you look at your statements and see a blizzard of trades you don’t understand… if you see high commission costs… or if you feel you were paying a high fee for no work at all… you need to speak up.
Our law firm is dedicated to holding brokers and their firms accountable. We will analyze your account statements for free. We will run the real-world metrics (like the Cost-to-Equity Ratio) to see if you have a case.
Call us today for a 100% free, confidential review. You pay us nothing unless we recover your money.