Wrap Fees and “Reverse Churning” – Are You Paying Big Fees for No Good Reason?

Over the past several years, many brokerage firms have edged away from the traditional commission-based compensation model. Burned by claims of churning—trading their clients’ accounts at high velocity to generate big commissions—the firms have embraced a fee-based model instead.

The new model allows firms to collect substantial fees in an era where online discount brokerages have lowered commissions to a level that is nearly impossible for brick-and-mortar firms to match. And while the newer model makes sense for some investors, everyone should ask two blunt questions of their brokers: (1) why are you recommending this to me, and (2) does it make financial sense?

Often there are solid reasons for your financial advisor to charge you a percentage of assets under management. For example, if your account is heavily traded, the newer model may actually save you money when compared to what you would pay in commissions on all the trades. Or if your financial advisor does frequent, substantial analysis of the markets and your portfolio and provides valuable guidance in how to position your assets, that level of service can be well worth the fee.

But if your account is relatively stable and trades infrequently, and you feel your financial advisor is either inattentive or just “going through the motions,” you should schedule a meeting to talk about whether the current arrangement is in your best interest.

The SEC has recently identified fee-based accounts and “reverse churning” as an examination priority. Mason Braswell and Mark Schoeff Jr.’s article in Investment News, “SEC Takes Deep Dive on Conflicts of Interest,” explores this issue. And you can read the SEC’s priorities here.

If you have are concerned that you have been subjected to unjustified fees or “reverse churning,” please contact The Law Office of Kevin Galbraith at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.