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By Brice Van Elswyk
Founding Attorney

If you are like most people, you don’t have the time to manage your own money. Your job, daily commute, and family concerns eat up most of your waking hours, and you are not able to follow the market closely. This is why you need a broker or financial advisor to manage your accounts. These people are trained to follow market trends, making key transactions at critical junctures to both grow your wealth and shield it from any market downturns. 

Brokers and financial advisors are licensed by the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Both of these agencies help regulate the industry and have rules about how much brokers and financial advisors can charge their clients. For example, the SEC requires all brokerage charges to be fair and reasonable. Nevertheless, there are a number of brokers and financial advisors who play fast and loose with the rules, charging people like you excessive fees and commissions. Here are four different ways this can happen, as well as how you can protect yourself and your finances from this occurring.

1. Churning

Churning is the industry term for excessive transactions on an account. This is done to generate commissions, instead of to increase the value or income of your account. In most cases, brokers and financial advisors are paid on either a percentage or per transaction basis. With percentage fees, the brokers or financial advisor gets paid a percentage of the total dollar value of the transaction. This means that if the trade is for $100,000 and the commission rate is 0.1%, the commission will be $100 for the trade. Here, churning would be done to make as many high-value trades as possible to boost the commissions.

On a per transaction basis, there is a set fee for the trade, and in many cases, there is no dollar limit. So, if your financial advisor buys $500 worth of Tesla stock or $50,000 worth of Tesla, you will still pay the same commission. In this situation, your broker or financial advisor would be churning the account by buying the $50,000 of Tesla stock piecemeal instead of a single transaction, thus yielding him or her more trades and more commissions.

The way to guard against this is to require your broker or financial advisor to confirm all transactions with you beforehand. In addition, you need to review your account statement every single month. You can also avoid this by having a set monthly fee based on the total value of the account as opposed to commissions per trade if you have an aggressive market strategy.

2. Reverse churning

This is the inverse of the churning scheme outlined above. If your financial situation requires you to take a passive strategy, buying and holding high-yield assets, then having a monthly fee based on the valuation could cost you more money than paying commissions based on transactions. In other words, if you are holding, then your broker or financial advisor isn’t doing much for your account except collecting his or her fees and commissions. In this case, you should see if your fee structure actually fits your long-term strategy.

3. Wrap fees

It is not unusual to have fees based on the total value of the funds under management. For investors with an aggressive market strategy, this proves to be more cost-effective than per transaction commissions. However, the industry has a guideline for these advisory or wrap fees charged by brokers and financial advisors. In general, they should be no more than 2% of the total value of the investment portfolio. Usually, high-net-worth individuals will get their financial advisor to take a lower fee as the price for getting to handle a larger value portfolio. Middle-class investors don’t have this ability and have to pay a premium for getting the services of a broker or financial advisor. Nevertheless, if your annual fee is greater than 2%, you may be getting overcharged by your advisor.

4. Hidden fees

Many commercial brokerage firms maintain large research departments. These are the folks who predict which securities will be going up or down over the next quarter. Their costs can often be baked into the annual fee you are paying your broker or financial advisor. The same goes for marketing costs, annual and custodian fees, and other expenses. All of these are required to be disclosed to you, but too many investors miss the fine print.

When you open an account with a broker or financial advisor, they are required to disclose the fees they charge. However, too many folks simply sign on the bottom line without carefully reading the account documents. In addition, whenever there is a change in the fee structure, they are required to give you notice. Far too many people take that notice and throw it away without even opening the envelope. Finally, your broker and financial advisor is required to provide you with account statements. This will not only show you the value of your portfolio but also how much you have paid them for commissions, fees, and charges. 

It is important to read everything you receive from your broker. If you see something on any of these documents, say something. Even if you are not a high-net-worth individual, you can get your broker or financial advisor to waive certain fees. If they refuse to do so, then you can always shop around for someone who will provide you with a better deal.

If you think you are getting charged excessive fees and commissions, call our firm today

Brokers and financial advisors have a fiduciary duty to work in your best interest. This includes working to increase the value of your investments. If they are charging you excessive fees and commissions, or engaging in conduct that enriches themselves at your expense, then they are violating this duty, as well as their SEC and FINRA licenses. The Van Elswyk Firm is experienced in dealing with brokers and financial advisors who put themselves ahead of their clients. Call us today so we can work to protect you against such abusive conduct.

About the Author
Brice Van Elswyk started his professional career as an investment banker in 1998. Over the next 14 years, Brice worked for several international investment banks, eventually specializing in structured products with complex tax, accounting, and regulatory capital constraints.While at the State Attorney’s Office, Brice prosecuted crimes ranging from misdemeanors such as DUI’s and domestic batteries, all the way to homicide, drug trafficking and sex crimes. Most recently, Brice was a specialty prosecutor focusing on capital sex crimes and crimes against children. Now, Brice combines his vast knowledge of finance, and his extensive experience as a trial attorney to serve clients in both criminal defense and civil matters.