Experience, Creativity And Skill

Does Your Broker Have a Conflict of Interest?

by | May 17, 2019 | Churning

Does your broker have a conflict of interest? The answer, most likely, is yes. The traditional form of compensation received by brokers is a commission each time an investment is bought or sold in your brokerage account. This compensation structure gives your broker financial incentives that are not aligned with your own. By receiving a commission based upon the frequency of trades in your account, a broker has a financial incentive to engage in more trades, regardless of whether that is actually in your financial best interest.  Under the commission-based compensation model, there is no direct link between the amount of the broker’s compensation and the financial performance of your account. 

The financial incentives provided by the commission-based compensation structure can encourage unethical brokers to engage in a practice known as “churning.” Churning, also known as excessive trading, overrtrading, or twisting, is a form of misconduct where a broker engages in high-volume trading in a customer’s account in order to increase commissions, at the expense of the customer, without regards to whether the trading is financially advisable and consistent with the customer’s investment objectives.  Churning is a violation of FINRA Rules and can cause commissions to consume all profit earned in an account. 

Brokers also often have financial incentives to recommend investments to customers based upon the amount of commission received for selling a particular investment product, without regards to whether that product is the best alternative for the customer.  For example, certain annuities pay large commissions to the broker that are built into the annuity and may not be apparent to the customer.  Likewise, a broker may have financial incentives, as well as other forms of pressure, to sell his own firm’s proprietary investment products in preference to better, lower cost, more suitable products available on the market.

If you believe that your account may have been churned, or that your broker put his interests before your own, contact our firm for a free consultation.  We can analyze the trading in your account to determine whether you may have a claim against your broker to recover damages arising from churning, unsuitable investment strategies, or other misconduct.