Excessive Trading

As investors, we place a lot of trust in our brokers to provide us with sound advice and to make the right decisions based on what is best for our financial futures. In some cases, however, brokers abuse their authority or fail to exercise due care when managing an account. One way that this can occur is through excessive trading, which is sometimes referred to as churning. This can lead to devastating and irreversible financial damage to many investors. Fortunately, the law recognizes a cause of action against brokers who fail to exercise a certain level of care when handling a client’s accounts. Attorney Steve A. Buchwalter has over 20 years of experience in securities law and investment law and has represented many residents of Los Angeles County and other areas of Southern California who have been burned by their brokers.

Excessive trading or churning occurs when a broker makes several trades in a client’s account for the primary purpose of generating commissions. The trades are usually made to the detriment of the client’s account. There are two main ways to determine whether a broker has engaged in excessive trading. First, the annual turnover ratio doctrine, or ATR, refers to the ratio of the total price of the purchases made for the account during a specific time period to the amount invested.

Portfolio turnover is defined as a measure of how frequently a fund’s managers purchase and sell its assets. This figure can be calculated by dividing the lesser of the total amount of newly purchased securities, or the amount of securities sold, by the total net asset value of the fund. According to industry standards, an annualized turnover ratio of four or more is considered a presumptive indication of churning, and a ratio of six is deemed conclusive.

The second method for identifying excessive trading is the cost-equity ratio, which constitutes the total fees charged by the broker divided by the average net equity of the account. This amount determines the amount of money a portfolio must return in order to break even. For example, if a broker generated $100 in commissions, and your average account balance was $1,000, the cost-equity ratio would be 10 percent. Accordingly, your account would need to generate at least 10% in profits to break even. If your broker is generating a ratio of 10 percent or more, it may suggest that your broker’s trades do not justify the returns on the account.

These two methods are not exhaustive. Excessive trading can also occur when the trades are not in line with the client’s investment profile. In other words, excessive trading can even occur at levels below what is mentioned above.

Churning claims are often tied to misrepresentation and breach of fiduciary duty claims. Brokers who aim to engage in excessive trading may feed misinformation to their clients with the hope of convincing them that the excessive trades are necessary, or without informing them of their risks of trading alot. There are a number of state and federal laws that allow an investor to bring a claim against a broker for misrepresentation. For example, the Securities Act of 1933, the Securities Exchange Act of 1934, and California’s Corporate Securities Act of 1968 provide remedies to investors who have been harmed by broker misconduct if they can prove that they relied on a broker’s fraudulent information or omissions.

Getting burned by your broker may be a devastating experience. Although it may seem like your financial position is hopeless, there are often legal remedies available to investors that can help them recover the compensation they need. As a former stockbroker, Los Angeles lawyer Steve A. Buchwalter can help victims of fraud and other misconduct by financial advisors aggressively assert their rights. We offer a free consultation to help you explore your rights, so you have nothing to lose. Our clients are located in cities throughout Southern California, such as Beverly Hills, Pasadena, and Irvine. Call us now at 1-(818) 501-8987 or contact us online to set up an appointment.