Many firms today are recommending that clients pay an annual fee to manage their accounts – rather than simply pay commissions when the client makes a trade. These fees, which are typically computed on the entire value of the account, can range from less than 1% to up to 3% of the account’s value. If an investor is an active trader, this can potentially be a good deal. However, if an investor trades rarely – or not at all – it is likely to be fraudulent and constitute “reverse churning.” Investment advisors always have a fiduciary duty to put their client’s interests first.
Even if you are an active investor, your brokerage account can be the subject of reverse churning if fees are being charged on inappropriate assets. Certain assets in an account do not need to be “managed” by your broker. These include substantial positions in cash, bonds bought with the intention of beng held to hold to maturity and other securities intended to be long-term holds – such as stock in the company the investor works for or mutual funds bought for the long-term. Reverse churning – overcharging for “management” – is widespread, with stockbrokers ignoring their obligation/ability to shield these assets from management fees. While this abuse may sound minor, unneeded management fees can add up. For example, a $500,000 account subjected to a 3% fee accumulates an overcharge of $75,000 in just 5 years. That is capital that is needlessly lost to you and your heirs and which could have been invested elsewhere.
If you suspect your firm may have engaged in “reverse churning” – charging you a management fee on an account that rarely or never trades or on assets which require no “management“ – we may be able to help. Contact the attorneys at PCJ law for a free, informative consultation at 901-820-4433.