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”).