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Excessive Trading: FINRA’s Red Flags and Recommendations for Investors

September 3, 2021 Blog

Excessive trading is a very real concern for investors who work with stockbrokers and investment advisors. Engaging in excessive trading allows brokers and advisors to rack up substantial commissions—and they are able to earn these commissions regardless of the performance of their clients’ portfolios. As a result, brokers and advisors can profit while their clients lose their hard-earned principal; and, unfortunately, this leaves many clients in need of a stock market or investment fraud attorney.

FINRA’s Red Flags for Excessive Trading

The Financial Industry Regulatory Authority (FINRA) has published an Investor Insight that provides some practical tips for investors to protect themselves against excessive trading. The Investor Insight includes three red flags of which all investors should be aware:

  • Unauthorized Trading – Unauthorized trading and excessive trading often go hand-in-hand. FINRA recommends that investors keep a list of all trades they authorize so that it is easy to spot unauthorized trades.
  • High Volume or In-and-Out Trading – While a high volume of trades can be consistent with certain types of investment strategies, it isn’t practical for most individual investors. In-and-out trading (buying and selling securities quickly) can also be a sign that a broker or advisor is focused solely on generating commissions.
  • Excessive Fees or Commissions – If fees and commissions are limiting the profitability of your investments, this could be a sign of excessive trading as well. FINRA recommends watching out for both (i) total fees or commissions that seem high, and (ii) one segment of your portfolio consistently generating higher fees than any other.

FINRA’s Three “Rs” for Avoiding (or Uncovering) Excessive Trading

FINRA’s Investor Insight also provides tips for investors to avoid (or uncover) excessive trading. The Investor Insight refers to these tips as the three “Rs”:

  • Rationale – Is there a sound rationale for the trades your broker or advisor is making on your behalf? All trading activity should be consistent with your investment objectives and risk tolerance. If your broker’s or advisor’s trades don’t make sense from a strategic perspective, this could be a sign of securities fraud.
  • Reasonableness – Stockbrokers and investment advisors are entitled to earn a reasonable fee for their services. If your broker’s or advisor’s fees or commissions seem unreasonable (either in the aggregate or for a particular type of investment), this could be indicative of excessive trading.
  • Return on Investment – Given the fees and commissions you are paying, how much would your investments need to earn just for you to break even? If your entire return on investment (or more) is going toward paying your broker or advisor, something isn’t right. Most likely, your investment professional is engaging in excessive trading, charging excessive fees or both.

Schedule a Free Consultation with a Stock Market Attorney

Do you have concerns about excessive trading in your investment portfolio? If so, you should speak with a stock broker attorney promptly. To find out if you may be entitled to recover your investment losses through FINRA arbitration, call 212-742-1414 or request a free consultation online now.