It seems like the story of greed and corruption never ends. Every time you turn around, there is another news article about how some conglomeration or company has defrauded investors out of their money. The latest group to come under fire is stockbrokers. Here are some ways to make them pay back commissions they didn't earn.
Some stockbrokers would buy and sell stocks in an account without the client knowing, with the intent of earning additional commissions. They receive anywhere from 7% to 10% for selling investments to clients. They only get 3% or less for selling these same investments when they trade on their behalf. That's why it's called “churning” — because they're making money by moving your money around without knowledge or consent! There are several ways to stop unauthorized churning.
First, talk with your stockbroker and ask if he/she traded in your account without your knowledge or consent. They may tell you that they made trades to make their job easier. Ask them which investments they sold to you after buying back the same investment later at a lower price (churning). Second, check with the Financial Industry Regulatory Authority (FINRA) for additional information. Third, report any suspicious activity to your broker's firm — especially if there was no documentation of these transactions on your monthly statements! Lastly, don't remain silent about this problem. If brokers get away with this, they will continue to churn accounts. The more people who report churning activity, the sooner it will be stopped!
Many of these brokers are doing this to increase their income. They may have clients with small accounts who don't know how the process works, so they churn their own accounts for commissions. The last thing a broker wants is to invest in a product for you and not get paid! Now, some brokers cheat customers out of commissions by either never executing trades or making unauthorized trades. There is an ethical code that they must follow.
Customers should be able to expect that their money managers are working with them — not against them. Just like any other job, you do your job well and receive an appropriate paycheck. You don't go into work one day, not do anything, then end up getting paid for it! If stockbrokers are unable to make up for their actions through restitution, they should be fired and not allowed to work in the finance industry ever again!
Unfortunately, this does happen to people all the time. One in four investors states that their accounts have been churned. The problem is that if you hire a new firm, they may not be able to find out for months or years what actually happened with your money because it could involve different brokers! This can lead to less money in retirement funds when it could have otherwise earned much better returns through low-cost index funds instead of mutual funds chosen by individual brokers.
One way customers can prevent this from happening is to ask their stockbroker directly if he/she makes trades without them knowing about it. If so, then talk with the broker's supervisor and let him or her know what is happening. You can also check your monthly statements to see if there are any suspicious, unauthorized trades or withdrawals. Make sure you look at the cash disbursements section for any additional cash that was withdrawn from an account without your permission.
When hiring a new stockbroker, it's important to ask them about their business practices and what they know about churning. Some brokers may not want to answer these types of questions because it shows how much they really care about their clients! Another thing you could do is create a fee schedule so that fees are clearly known before any transactions take place. By creating this schedule, advisers will have less flexibility in changing commissions mid-transaction!
If customers don't want to go through legal action, there are still other ways they can be reimbursed. If customers prefer, brokers may reimburse their accounts by buying back investments that were previously sold back at lower prices without the client's knowledge or consent! This will give you your money back, but of course, it will not compensate you for any additional losses that may have occurred.
Customers need to protect themselves and their investments by asking the right questions and investigating any suspicious activity that occurs throughout accounts. Commissions can be reimbursed in legal or non-legal ways. This is not okay, and it shouldn't be as common as it is today, so if it happens, customers have the right to get their money back!