Investing

3 Ways to Guard Against Excessive Trading in Your Brokerage Account
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Brokerage firms are typically paid transaction-based compensation. That means you’re charged more when there are more trades in your account, and the firm might have an incentive to encourage you to trade often. If you work with a registered financial professional and notice a seemingly high level of activity in your brokerage account, this could be a sign of a type of misconduct known as “excessive trading.”

Excessive trading occurs when a registered financial professional recommends a level and type of activity that, as a whole, doesn’t align with the customer’s investment goals, risk tolerance and financial circumstances. Egregious cases involving the intent to defraud the customer or carried out with reckless disregard for a customer’s interests are considered “churning”—a form of securities fraud. Because all trading involves some amount of cost—including fees and expenses—excessive trading can significantly impact the amount paid by a customer over time. 

Brokerage firms are responsible for supervising customer accounts for signs of excessive trading. They might even send you a letter to alert you to trading activity and ask if you’re satisfied with your registered financial professional’s service. If this occurs, use it as an opportunity to understand what’s happening in your account, as discussed below.

There are also actions you can take as an investor to help you protect yourself.

How to Protect Yourself

The vast majority of registered financial professionals have no record of misconduct. That said, every year FINRA brings disciplinary actions involving excessive trading. Here are three steps you can take to avoid or mitigate excessive trading in your brokerage accounts:

1. Review Your Account Documents – Whether you’re opening your account in person at your registered financial professional’s office or doing it online, take time to carefully review and verify the information before you sign—especially questions related to risk tolerance and investment objectives. If your account documents don’t accurately reflect what you told the firm or your registered financial professional about your risk tolerance, investment objectives and financial circumstances, you should immediately contact your registered financial professional or brokerage firm.

2. Check Your Trade Confirmations and Account Statements – Be sure you regularly review trade confirmations and brokerage account statements as you receive them. Contact your registered financial professional or firm in writing if you notice any of the following:

  • Unauthorized Trading – Be alert to trades that you never approved. You might find it helpful to take notes of trades you’ve approved at the time you communicate your approval to your registered financial professional. Immediately notify your registered financial professional or firm if you observe unauthorized trading in your account.
     
  • High Volume or In-And-Out Trading – Keep an eye out for a level of trading activity that’s inconsistent with your investment objectives, such as high volume trading or buying and selling the same securities in a relatively short period of time. If you’re pursuing a conservative strategy, for example, you wouldn’t expect to see the same level of activity in your account as a customer with a high risk tolerance.

    However, pursuing an aggressive strategy doesn’t necessarily mean frequent transactions are in your best interest. Be especially wary if your registered financial professional repeatedly recommends that you buy and sell the same securities, or sell all or part of your portfolio and reinvest the proceeds quickly, only to recommend selling the newly acquired securities shortly thereafter. This practice, known as in-and-out trading, can generate commissions for the registered financial professional that exceed any gains you’d expect to receive and is unlikely to be consistent with your investment objectives.
     
  • Excessive Fees or Commissions – Monitor your statements carefully to understand all commissions, fees and sales charges. If the total amount you’re paying seems high, or if one segment of your portfolio is consistently generating higher fees than any other, there’s a chance this could be due to 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 registered financial professional or firm to give you more information if you have questions about any costs. 

3. Ask Questions – If you identify any of the signs of excessive trading described above, or if your firm detects a high volume of activity in your account and asks if you’re satisfied with your registered financial professional’s service, ask for an explanation of the three Rs: 

  • What’s the rationale for the recommended trading activity, considering your investment objectives, risk tolerance and financial circumstances? Your registered financial professional should be pursuing a trading strategy that respects your limits.
     
  • The total commissions or other fees you’ve paid, including markups and margin interest costs, should be reasonable. If you don’t understand any charges, ask the firm to provide further details. They should be able to explain each commission or fee associated with your investments.
     
  • What percentage return on your investment would you need to break even based on the fees you’re paying? With this information, you can determine whether commissions or other fees are eating up an undue proportion of your investment gains.

Keep in mind that excessive trading can still be occurring even if your account balance is growing.

Where to Turn for Help

In addition to speaking with your registered financial professional, consider escalating concerns about the possibility of excessive trading in your account to a manager or your firm’s compliance department (ideally in writing). If you’re not satisfied with the response to your concerns or want to report other problems with your registered financial professional or firm, you can file a complaint with FINRA or submit a complaint to the Securities Exchange Commission (SEC).

For other questions or concerns about your brokerage account statements or 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.