As an investor, you are more than willing to pay a broker for premium service. You believe in working with the best to maximize your return. Trades cost money in the short term, but you’re in this for the long-term gains, and that’s what you want to see.
That said, you don’t want your broker to take advantage of you or try to make more money off of your account than they should. One way they do this is through churning, and you need to be aware of this illegal and unethical practice.
Brokers get paid per trade
Churning happens when brokers get paid whenever they take action on your account. They get a commission per trade. The idea behind this, of course, is that the broker wants to make an excellent trade with your money and help you see significant returns. This outweighs the payment for the trade by a large margin, so you’re paying for the broker’s time and expertise.
The issue is that the broker may make excessive trades on your account, with the strict goal of generating more commissions. This can cost you money in a few ways. First and foremost, you may pay two or three times as much in commission since too many trades are happening. Furthermore, you may not see the earnings you hoped for because the broker is now trading for their own benefit, not to actually find you the best position for your money.
The best way to recognize churning is just by looking for an increase in trades. If there are suddenly far more than you expected, that’s a red flag. Another thing to look for is when the trades do not seem to align with your own investing goals. This suggests that the broker is trading only for their own benefit, not for yours.
What can you do next?
If you have been a victim of churning, you’re likely feeling frustrated that an apparent expert used their position to take advantage of you. Remember that churning is an illegal process. This means you do have plenty of legal options, and you just need to know what next steps to take.