Churning is excessive trading of assets in a client's brokerage account in order to generate commissions. Churning is illegal and unethical and is subject to severe fines and sanctions, yet, it happens all the time.
Know your broker, understand your financial planner’s fee structure for commissions, review your statements, and keep your eyes open for frequent trading. Churning is hard to spot. An investor may conclude that a broker has been over trading when the frequency of trades becomes counterproductive to the client's investment objectives, driving commission costs higher without observable results over time.
Churning also applies to excessive or unnecessary trading of mutual funds and annuities. Mutual funds with an upfront load, the so-called A-shares, are intended to be long-term investments. Selling an A-share fund within five years and purchasing another A-share fund needs to be justified as a prudent investment decision.
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