Displaying items by tag: reverse churning

(New York)

Advisors need to prepare themselves for a nasty eventuality that looks like a near certainty when the market next crashes. According to a top wealth management lawyer, there are likely to be a great deal of lawsuits filed by clients against their advisors whenever the next big crash comes. The lawsuits will be focused on claims of reverse churning, or that advisors put client money in fee-baseds account in order to collect fees without offering significant advice or trading. Since switching clients into fee-based accounts (versus commission-based accounts) has been a very common practice over the last several years, the atmosphere is ripe for a massive wave of lawsuits.

FINSUM: This article is worryingly insightful. The big switch to fee-based accounts, which preceded but also corresponded to the DOL rule, might have set up advisors for some major legal headaches in the next downturn.

(New York)

Advisors pay attention. For the last two years, many firms, large and small, have been been moving their clients into fee-based accounts. This mostly started as a response to the fiduciary rule, but had the side benefit of driving more revenue for advisors. However, a new lawsuit against Edward Jones says that doing say may violate reverse churning rules. The case could expose all firms that have undertaken the same practice. Consumer Federation of America head Barbara Roper commented that “We have heard persistent reports that this is happening at a number of firms, and I have heard that from sources I consider reliable”.

FINSUM: This is a tough situation for firms. On the one hand you are being subjected to new rules and guidance saying fee-based accounts are better and safer, but because you are moving to such a model (many big brokers almost did away with commission based accounts), you are being subjected to claims of reverse churning. What a mess.