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Excessive Fees/Churning

Many of our cases involve allegations of excessive commissions or account churning, which are two separate allegations. We most commonly see excessive commission claims in cases involving variable annuities or other non-traded products, such as REITs. This is because non-traded products usually pay significantly more fees to stock brokers and financial advisors. Often times, investors have no idea how much they pay in fees for these products. This is because commissions for non-traded products are often disclosed to investors in very dense offering materials and not in a simple trade confirmation.

Churning involves buying and selling of securities at a high volume for the sole purpose of generating commissions. Most churning cases involve a long pattern of trading. The basics of a churning case are simple. Excessive trading increases commissions, which requires investors to achieve a higher rate of return to overcome the trading costs. The higher the volume of trading, the higher the costs and the lower the likelihood that the investment strategy will become profitable.

We have been involved in numerous excessive fee and churning cases. One notable case resulted in an award in excess of $1 million and a write up in the Wall Street Journal. A copy of that article can be accessed here: “Broker Ordered to Pay More than $1 Million in Churning Case” Wall Street Journal, October 13, 2014.

If you or someone you know believes they were the victim of churning, they may be able to recover their losses. Please contact us for a free and confidential consultation.

What is churning?

Churning is the buying and selling of securities for the sole purpose of generating commissions for a stock broker or financial adviser.
What is the difference between a fee based and a transactional account?

A fee based account charges a fixed percentage of the assets under management – generally 1-1.5%. A transactional account charges commissions for every trade or transaction.

Is churning illegal?

Yes and unethical. It is a violation of SEC Rule 15c1-7 and other securities laws.

My financial adviser said they do not charge me commission, could this be right?

No.

What is an unsolicited order?

An unsolicited order is a term used to describe a securities order that is made at the request of the customer (i.e. the trading was the customer’s idea). Conversely, a solicited order is one that a financial professional actively presented to a customer. In our practice, orders are sometimes mismarked as “unsolicited” by a financial adviser in order to conceal more nefarious conduct.

How much did my financial adviser earn from my variable annuity or REIT sale?

The commissions for variable annuities and non-traded REITs can vary from 5%-7%. If you do not know, you should ask your financial adviser.