When we started on Wall Street decades ago, churning was considered one of the worst offenses a broker could commit. We watched firms dismiss advisors who engaged in this practice without hesitation. Today, the violations continue, and elderly investors remain the primary targets.
What happened at Merrill Lynch
FINRA announced this week that it has fined Merrill Lynch $12 million for supervisory failures that allowed brokers to engage in excessive trading in customer accounts. The violations occurred between 2020 and 2023 across multiple branch offices nationwide.
Regulators found that Merrill Lynch failed to establish adequate supervisory systems to detect and prevent churning activity. The firm’s automated surveillance systems generated alerts, but supervisors routinely dismissed them without proper investigation.
The human cost of excessive trading
The victims in this case were primarily retirees aged 65 and older who had entrusted their life savings to Merrill Lynch advisors. FINRA documented cases where individual accounts lost over $400,000 in retirement assets due to unauthorized trading activity.
Churning generates commissions for brokers while destroying wealth for investors. Each unnecessary trade strips capital from accounts through fees, spreads, and market impact costs.
How churning schemes operate
Brokers engaging in churning typically target accounts held by elderly clients. These investors often lack the financial sophistication to recognize excessive activity and may feel intimidated questioning their advisor.
The trading patterns are clear when you know what to look for. Accounts showing turnover rates exceeding 100% annually warrant immediate scrutiny. Monthly statements with dozens of trades in conservative portfolios signal potential misconduct.
Red flags every investor should recognize
Monitor your account statements for warning signs. High turnover in supposedly buy-and-hold portfolios indicates trouble. Unauthorized trades appearing on your statements require immediate action.
Review your fee disclosures carefully. When commissions appear disproportionate to account value, your broker may be prioritizing their income over your returns.
