By Jennifer Helmy

As an investor, do you take time every month or quarter to read each statement you receive from your brokerage firm? If not, you should take the time to do this so you may quickly identify possible signs of excessive trading in your brokerage account. These three red flags may indicate excessive trading:

• Unauthorized trading: Look out for trades in your account that were made without your authorization.
• Frequent trading: Look out for the frequent buying and selling of securities that seem inconsistent with your investment goals or risk tolerance. Some common terms for investment goals include “capital preservation,” “income,” and “growth.” Some common terms for risk-tolerance levels include “conservative,” “moderately aggressive” and “ aggressive growth.”
• Excessive fees: You should be suspicious if the total amount of fees seems too high, or if one segment of your portfolio consistently generates high fees.

Generally, a broker earns a portion of commissions or fees on each purchase or sale of securities that the firm makes for you. When a broker excessively buys and sells (i.e., trades) without considering your investment goals, and his primary purpose is to generate commissions for himself, this may constitute the illegal practice of “churning.” To get the exact amount of commissions or fees your broker earned, you have to directly ask your broker, because your account statements and trade confirmations do not always reflect the full amount of fees.

What should you do if you see a high volume of trading in your account? Call your brokerage firm and ask about the reason for a trade or fee. If your firm notices the high volume of trading and contacts you to confirm your authorization or satisfaction with how your broker is handing the account, you may want to ask your broker a few questions:

• Considering your investment objectives, why did the broker recommended these specific trades and investment strategies?
• What is the total amount of commissions or transaction fees that you have paid over the last month, quarter, or year?
• What percentage return on your investment would you need to break even on the pees you are paying?

If you are suspicious of excessive trading in your account after receiving these answers, then you should speak to your broker’s manager or the firm’s compliance department to help you understand the inconsistency between your investment objectives and the nature of the trading in your account. If you recently notified your broker of a change in your investment objectives, but the trades are not consistent with this change, be sure to notify the firm.

If you still have any complaints or problems with a broker, including if you believe he or she is engaging in excessive trading or churning, then you can submit a complaint in writing to your brokerage firm and to the Securities and Exchange Commission (“SEC”) or the Financial Industry Regulatory Authority (“FINRA”).

By Alex Monje

President Donald Trump has nominated Wall Street lawyer, Jay Clayton, to head the Securities and Exchange Commission (SEC). Jay Clayton, of the high-powered New York City firm Sullivan & Cromwell, has built a career defending the likes of Goldman Sachs and other Wall Street banks. There is little doubt that Clayton is qualified to lead the SEC; his successful career in securities litigation alone is evidence that he possesses a mastery of securities law. Clayton is also a double graduate of UPenn, which is considered the top school for finance, and holds a B.A. from Cambridge. Frankly, it seems like Clayton is the most qualified nominee for his respective position when compared to all of Trump’s other nominees for various executive posts.

What, then, could ever be the problem?

One of the SEC’s leading unsettled agenda items is the proposed regulation that would require stockbrokers to act in a client’s best interest when selling and giving advice on non-retirement accounts, rather than pitching products that would yield the highest commission for the broker. Another issue yet to be addressed is the SEC’s authority under Dodd-Frank to ban or limit the use of forced arbitration clauses in brokerage accounts. Will Clayton allow the SEC to use that authority? What about the proposed “Goldman Rule”? Will Clayton crack down on the conflicts of interests these banks face when acting as both a broker and a dealer in the same transaction? You know, because that contributed to the financial crisis and stuff?

What’s the issue with Clayton?

Trump is asking a man who has made an exceptionally successful career out of defending Wall Street against investors, and who even once argued that bribery laws should be relaxed in order to make American businesses more competitive abroad, to now stand up for the little guy.

The problem is not whether or not he is capable. Jay Clayton is an exceptionally capable securities attorney. The question is – will he fight to represent and protect the same parties he has built a career defending Wall Street against?

If the answer is yes, Americans have a Leonidas on their side – a truly accomplished advocate.

However, should the American people truly expect Clayton to abruptly about-face? Will Clayton increase the oversight of exchange traded funds as they become more advanced and complex, or will his experience lead him to shield banks from new regulations?

The real question the American people should ask Clayton is – are you with us?

By Patrick Kalbac

Last April, the Department of Labor implemented a new fiduciary rule. The fiduciary rule requires financial advisors to put their client’s interest before their own. This differs from the less stringent suitability standard which only requires that the recommended investment be appropriate for the investor. The fiduciary rule was intended to stop the biased advice that has drained retirement accounts for years. A 2015 study from the White House Council of Economic Advisers reports estimates of annual losses at around $17 billion a year for working and middle class families.

One type of conduct the rule targeted is churning, or excessive trading in order to generate commissions; however, despite regulators’ best efforts to discourage this illegal fee-generating tactic, a new problem has surfaced in the form of reverse churning. Reverse churning is the practice of putting an investor in an advisory or fee-based account which charges either a flat fee or an annual fee (usually around 1-2% of assets in the account), but then does not manage the account in order to earn the fee. In other words, an investor pays an advisor for doing nothing. This is a major concern for the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) as there has been a rise in fee-based accounts over the last decade.

For many investors, fee-based accounts can be beneficial. These account types help to reduce boiler-room tactics and forge better relationships between the investor and the advisor. Customers with fee-based accounts also tend to have access to a wider range of investment options and their accounts tend to be more effectively diversified. Nevertheless, these types of accounts are not appropriate for all investors. Fee-based accounts are more beneficial to those who actively trade and seek financial advice and recommendations. However, for investors that prefer a more passive investment strategy, fee-based accounts might not be the best option. It can create a conflict knowing that advisors are obtaining a fee despite a lack of trading and/or account management. In those cases, it likely would be more beneficial for the investors to sign a best interest contract exemption and put their assets into a traditional brokerage account that requires a commission-fee for each individual trade.

As with all accounts, fee-based accounts need to be monitored and customers need to be aware of the changing market conditions. It is critical that investors understand that there are pros and cons to fee-based accounts. The real benefits are dependent on the individual and the investment strategy that the investor is most comfortable with.