Excessive trading — also called churning — is one of the most common complaints investors file against financial advisors. It happens when an advisor buys and sells securities in your account primarily to generate commissions, not to serve your financial goals.
What is excessive trading?
Excessive trading occurs when a financial advisor executes an unusually high number of trades in your account, driving up transaction costs while providing little or no benefit to your portfolio. The key indicator is the turnover rate — how often the assets in your account are replaced with new ones.
FINRA defines excessive trading by examining three factors:
- Turnover rate — How frequently your account’s total value is replaced through buying and selling. A turnover rate above 6 per year raises red flags.
- Cost-to-equity ratio — The percentage of your account’s value consumed by trading costs. A ratio above 12% is considered excessive.
- Trading frequency — The sheer number of transactions compared to what’s reasonable for your investment objectives.
How to calculate if your account is being churned
Use this simple formula to check your cost-to-equity ratio:
- Add up all commissions and transaction fees you paid in the past 12 months
- Divide that total by your average account balance over the same period
- Multiply by 100 to get your percentage
If the result exceeds 12%, your advisor may be churning your account. Contact FINRA or a securities attorney immediately.
Warning signs of excessive trading
- Your monthly statement shows dozens of trades you did not authorize or discuss
- Your advisor calls frequently with “opportunities” that require immediate action
- Your account value grows slowly or declines while your advisor’s commissions mount
- Short-term holdings that are sold quickly after purchase — often within days or weeks
- Switching between similar mutual funds or annuities without a clear strategic reason
Real consequences: FINRA enforcement cases
FIRST has taken action against advisors for churning across the industry. Recent enforcement examples include:
- A California advisor fined $50,000 and suspended for 18 months after churning a senior citizen’s account with 400+ trades in 14 months
- A New York broker barred from the industry for excessive trading across six customer accounts, resulting in $340,000 in client losses
- A Florida advisor ordered to pay $125,000 in restitution after churning three retirement accounts with unnecessary options trades
What to do if you suspect churning
- Document everything — Save all statements, trade confirmations, and correspondence with your advisor
- Request an explanation — Ask your advisor in writing why each trade was made and how it serves your goals
- Check BrokerCheck — Look up your advisor’s disclosure history at brokercheck.finra.org
- File a FINRA complaint — If the explanation doesn’t add up, file a complaint with FINRA
- Consult a securities attorney — For significant losses, an attorney can help you pursue FINRA arbitration
Protect yourself going forward
The best defense against churning is a fee-only advisor who charges a flat rate or percentage of assets under management — not per-transaction commissions. If your advisor earns commissions on trades, the incentive structure itself creates a conflict of interest.
Always require written authorization for trades above a set dollar threshold. And review your account statements monthly. If you see trades you don’t understand, question them immediately.
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