Break Away From The Pack

Avoiding allegations of churning with investment portfolios

On Behalf of | Nov 29, 2021 | Business And Commercial Litigation |

When working in the financial industry, either running a firm or as an investment advisor, it’s very important to always put the goals of the investors first. When they came to you to help them with their money, that is the type of service that they agreed to buy. They expect nothing less. 

One way that investors sometimes accuse firms and advisors of working against them is through something known as churning. This happens when the advisor gets paid a commission for every transaction that they make. If they buy or sell a stock, they make money for that work. 

If the advisor has full control of the account and is allowed to make trades as they see fit, a process designed to let them be flexible and react to the market in a profitable manner, they may be tempted to make transactions that are unnecessary just to generate that commission. If this is done, it is called churning, and it goes against the ethics of working in the best interests of the investors themselves. 

The importance of clear communication 

There are many things that you can do to avoid these types of allegations, starting with open communication outlining everything you’re doing and why you’re doing it. You can also clear things with the investors if you’re worried that they may disapprove. Beyond that, the more viable each transaction appears and the more money that is earned from it, the lower the odds of being accused of churning, even in situations when frequent transactions are made. 

That said, you could certainly face these allegations even when you know that you were trying to do what was best for the investors. If this happens, make sure you understand all of your dispute resolution options and the legal options that go along with them.