Churning
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Churning

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Churning

Churning is a deceptive and unethical practice where brokers or financial advisors excessively trade a client’s account to generate higher commissions or fees—regardless of whether the trades serve the client’s interests. This behaviour not only erodes profits but also undermines trust and violates fiduciary responsibility, especially in managed accounts or advisory relationships.

In this article, we’ll explore how churning works, the warning signs, how it harms traders, and the steps you can take to protect yourself from falling victim to this hidden fee trap.

What Is Churning?

Churning occurs when a broker, portfolio manager, or signal provider repeatedly buys and sells financial instruments in a client’s account for the primary purpose of generating commissions, not improving performance. This can happen in:

  • Managed trading accounts
  • Copy trading systems
  • Broker-assisted trading
  • Signal services with volume-based incentives

Brokers who earn a commission per trade have an incentive to increase trade frequency. When that incentive is abused, it becomes churning fraud.

How the Churning Scam Works

1. Gaining Trading Authority

The broker or manager gets permission to trade on your behalf through a Power of Attorney or managed account agreement.

2. Frequent, Unnecessary Trades

Your account is constantly opened and closed in short intervals. The trades don’t follow a clear strategy and rarely align with your risk profile or financial goals.

3. Commission Accumulation

Each trade earns the broker a fee. Even if your portfolio remains flat or loses money, they still profit from volume.

4. Disguising the Strategy

Churners often claim they’re “protecting the account from risk” or “taking advantage of short-term opportunities,” when in reality, the trades serve no strategic purpose.

Why Churning Is So Dangerous

  • High transaction costs drain capital
  • Tax inefficiencies from frequent realisation of gains/losses
  • Hidden erosion of long-term performance
  • Loss of trust in legitimate advisory relationships
  • Potential legal and regulatory violations under FCA, SEC, or ASIC rules

Red Flags of Churning

  • Excessive trading activity relative to account size
  • High turnover ratio (frequent full portfolio changes)
  • Unclear or erratic trading strategies
  • Minimal or no profit despite high trade volume
  • High commission or fee payments with no transparency
  • You’re discouraged from reviewing your trade history or statements

How to Calculate Turnover and Red-Flag Activity

Use the turnover ratio to measure trading volume:

Turnover Ratio = Total Value of Trades ÷ Average Account Balance

  • A ratio above 1.0 per month is a red flag
  • A cost-to-equity ratio exceeding 2–3% per month is excessive
  • Frequent round-trip trades (open/close within hours) are suspicious in managed accounts

How to Protect Yourself from Churning

1. Use Regulated Professionals

Work only with advisors or brokers licensed by the FCA, ASIC, or SEC. They’re held to ethical standards and subject to audits.

2. Read Your Statements

Regularly review your trade logs and account statements. Note the number of trades, costs, and whether each trade had a clear purpose.

3. Ask Questions

If you notice frequent trading, ask your broker to explain the reasoning behind each decision. Vague answers or defensiveness are red flags.

4. Demand Transparency

A trustworthy advisor will explain their fee structure, trading rationale, and how performance is measured.

5. Consider Flat-Fee or Performance-Based Accounts

Avoid commission-based models if you’re concerned about excessive trading. Look for fee-only advisers or platforms with fixed pricing.

Education Is Your Best Defence

Understanding the difference between active portfolio management and excessive, commission-driven trading is essential. Platforms like Traders MBA teach these principles through comprehensive, transparent trading courses that empower you to take control of your own capital.

Explore the full range of Traders MBA trading courses and learn how to spot unethical behaviour before it costs you.

Conclusion

Churning is a hidden form of exploitation that can devastate your trading account while enriching those you trust to help you grow. Whether you’re working with a broker, following signals, or using a managed account, always keep a close eye on trade frequency, costs, and performance alignment. Your money should work for you—not for someone else’s commissions.

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