Churning

When a broker frequently buys and sells in a client’s portfolio just to generate commissions, the practice is called churning. Broking firms earn a fee each time there is a trade and it doesn’t matter whether you--the client--are making money or not. Churning is an unethical practice. If you spot an unusual volume of transactions without any gains your portfolio, it’s a warning signal of churning. Money managers can also churn. Intheir case, it’s referred to as a high turnover rate. As money managers are under pressure to perform, they may adopt a short-term investment horizon and move in and out of solid investments that may be temporarily under-performing. You may minimize churning by opting for a wrap account in which a flat fee--rather than per transaction commissions--is paid.