When a broker unfairly charges the investor a fee to keep a fee-based advising account, it is known as reverse churning. The fee is typically calculated as an annual percentage applied to the whole account balance. As brokerage companies look for new ways to benefit from accounts that would otherwise not generate money, reverse churning is becoming increasingly prevalent.
Understanding Reverse Churning
When a financial adviser deposits a client’s funds into a fee-based advisory account to collect management fees and then does little to no actual management moving forward, it is referred to as reverse churning.
Many financial advisors have switched from commission-based income to fee-based advice accounts over the last ten years. You may have a strong case for reverse churning if the financial advisor provided little to no ongoing account-related advice.
Get to Know Your Accounts
Commission-based accounts and fee-based advising accounts are the two main types of investment accounts that brokerage firms normally provide. Therefore, you need to retain the account type that best serves your needs.
For infrequent traders who tend to buy and retain securities for extended periods, commission-based accounts are best. They don’t require regular account administration. Their resume remains unchanging. For investors who need constant guidance and portfolio monitoring, fee-based advisory accounts are a good option.
The sort of account that best meets your needs can be discussed with your investment advisor. Additionally, your financial advisor could suggest that you switch account types. It is crucial to take into account if switching from a commission-based account to a fee-based account is genuinely necessary in order to avoid reverse churning.
Is It Time for a Reverse Churning Lawsuit?
Your broker receives a flat fee for investment advice or a percentage of the assets under management in a fee-based advisory account, also called a wrap account. In contrast, a commission-based account only pays the broker when a financial product transaction, such as the purchase or sale of stock is completed.
Reverse churning happens when the broker purchases or sells investments in your commission-based account intending to earn a disproportionate amount of money. In this case, you can launch a churning claim against the broker. The value of your portfolio may have decreased, there may have been excessive commissions paid, and interest may have accrued.
Also, you may have a churning claim if there is frequent turnover in a commission-based account, but this is not the case with fee-based advising accounts. Since no commission is made on frequent account changes in fee-based advising accounts, this practice is not considered churning. As a result, you cannot bring a churning lawsuit against the broker.
Indicators of Churning in Your Account
You should be on the lookout for many of the following behavior that frequently signify a claim, even though reverse churning is deceptive and challenging to identify. In reverse churning claims, double dipping frequently occurs. Here, the broker uses your brokerage account to earn significant commissions before switching the client to an advisory account to earn additional fee-based revenues.
Also, the broker may be held accountable for churning if they improperly enroll you in fee-based advising accounts. The broker must be able to describe their trading philosophy or investing approach if they sign you up for a fee-based advising account.
The Broker Firm’s Liability in Reverse Churning
The brokerage firm has a duty to review and investigate your accounts for reverse churning. If your broker enrolls you into a fee-based advisory account, the brokerage firm must review the practice shortly after the transition and supervise the broker.
The firm’s investigation must reverse the enrollment of any low-volume activity accounts into fee-based advisory account structures.
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Are you a victim of fraudulent behavior, including reverse churning, by investment brokers? Our experienced and professional attorneys at Shwartz Law Firm can help you get justice. For more information or help, contact us today.