3 Ways to Guard Against Excessive Trading in Your Brokerage Account
For some investors, a high-volume trading strategy could be something they affirmatively seek—perhaps because they have a strong appetite for risk, desire to engage in market speculation, or both. For others, such a strategy might not make sense and could be a sign of a type of misconduct known as “excessive trading.”
When A Lot Becomes Too Much
Excessive trading occurs when a registered financial professional recommends a high number of trades that, in the aggregate, do not align with the customer’s investment goals and financial circumstances. And, where it involves the intent to defraud the customer or was carried out with reckless disregard for a customer’s interests, it is considered “churning”—a form of securities fraud.
3 Ways to Protect Yourself
The vast majority of registered financial professionals have no record of misconduct and strive to put their customers’ interests first. That said, every year, FINRA brings disciplinary actions involving excessive trading Here are three key steps you can take to avoid excessive trading in your brokerage accounts.
- Review Your Account Documents—Whether you are opening your account in person at your registered financial professional’s office or filling out your forms at home or online, take time to carefully review and verify the information before you sign—especially your risk tolerance and investment objectives. If at any time you notice a discrepancy between your account documents and the information you gave your broker concerning your risk tolerance, investment objectives, income, net worth or other information, you should immediately contact your broker or brokerage firm.
- Check Your Trade Confirmations and Account Statements—Be sure you regularly review account statements and trade confirmations as they’re issued. Don’t hesitate to contact your broker or brokerage firm if you notice any of the following:
- Unauthorized Trading—Take action if you notice unauthorized trades in your account or receive confirmation of a trade you never approved. To guard against unauthorized trading, it can be useful to take notes of trades you have approved at the time you communicate your approval to your broker. If you observe unauthorized trading in your account, immediately contact your broker or his or her firm.
- High Volume or In-And-Out Trading—Keep an eye out for a high volume of trading activity and repetitive transactions in securities that are inconsistent with your investment objectives. If you’re pursuing a conservative strategy, you would not expect to see a high volume of trading or as many trades in your account as a customer with a higher risk tolerance. However, even pursuing an aggressive strategy doesn’t necessarily mean frequent transactions are suitable or in your best interests. Be especially wary of your broker repeatedly buying and selling the same securities time and again, or your broker selling all or part of your portfolio, reinvesting the proceeds immediately, only to sell the newly acquired securities shortly thereafter. This practice, known as in-and-out trading, can result in commissions generated for the broker exceeding any gain you’d expect to receive and is unlikely to be consistent with your investment objectives or otherwise in your best interests.
- Excessive Fees or Commissions—Fees and commissions are no customer’s favorite part of investing. All the more reason to monitor your statements carefully and be aware of how much money you’re being charged for the activity associated with your account. If the total amount of fees or commissions you’re paying seems high, or if one segment of your portfolio is consistently generating higher fees than any other, there’s a chance you’re being saddled with commissions or other expenses as a result of excessive trading. Because account statements and trade confirmations don’t always disclose every fee associated with the trading activity in your account, you shouldn’t hesitate to ask your broker to give you more information if you have questions about any costs.
- Ask Questions—In the event you identify any of the signs of excessive trading described above, or if your brokerage firm detects a high volume of activity in your account and asks if you’re satisfied with your broker’s service, you should ask for an explanation of the three Rs:
- The rationale for the recommended trading activity, in light of your investment objectives and risk tolerance. Everyone has a certain level of risk they’re able to tolerate before they stop sleeping well at night. Your broker should be pursuing a trading strategy that respects your limits.
- The total commissions or other transaction fees you’ve paid over the past month, quarter, or year associated with your investments, including markups and margin interest costs. These fees and commissions should be reasonable, so if you do not understand the reason for an amount you are being charged, ask your broker to provide further details. Your broker should be able to explain each commission or fee associated with your investments.
- What percentage return on your investment you would need to break even on the fees you are paying. With this information, you can determine whether commissions or other fees are eating up an undue proportion of your investment gains.
Where to Turn for Help
If conversations with the firm’s management or compliance team do not provide further guidance, or you would like to report other problems with your broker, you may file a complaint using FINRA’s online Complaint Center or you may submit a complaint to the SEC. For other questions or concerns about your brokerage account statements of your investments, call the FINRA Securities Helpline for Seniors toll-free at 844-57-HELPS (844-574-3577) Monday through Friday from 9 a.m. – 5 p.m. Eastern Time.
- FINRA: What to Expect When You Open a Brokerage Account
- FINRA: 10 Tips to Keep Track of Your Investments
- NASAA, FINRA, and SIPC: It Pays to Understand Your Brokerage Account Statements and Trade Confirmations
- SEC: Excessive Trading at Investors’ Expense
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FINRA is dedicated to investor protection and market integrity. It regulates one critical part of the securities industry – brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.
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