Did You Get Churned By Your Investment Professional

securities scamMost people don’t realize it but they may have, at one time, been scammed by their investment professional.  I know it sounds crazy but this happens almost every single day.  If you think every investment professional is a saint you are dead wrong.

The Turn And Burn Scam

Today, I will be giving you one example of a client of mine who got caught up in a scam called the ‘turn and burn’.  This is a particular type of scam where an investment professional shifts money from one account to another, in orderto make a commission.

The industry term for this scam is churning.  The dictionary defines churning as “trading excessively in order to earn more in commissions”.  This is a big no-no in the securities industry.  For example, if you had a mutual fund with XYZ Company, they would buy and sell stocks within the fund to earn more money.

Later in this article I will show how you can avoid this scam.

How My Client Got Churned

In the example above, churning happened inside the actual mutual fund.  However there is another way it can happen too and the worst part about it is that you may not even know it happened to you until it’s too late.

In my clients case he had been with me for just over a year when another financial professional called him and stuck his foot in the door.  So what happened?  The representative for another broker dealer convinced him that he would be better off in one of their funds and not the one he currently owned.

You might be thinking, what is so bad about switching at this point if what he has is that much better why not go with it?   First, the current account the client had was only a year old.  To recoup the cost of the sale charge of around 5.5% it would take a few years to do this.   Second, the sales charge he paid on the second fund he switched to was around 6%.

So let’s add this up 5.5% plus 6%.  That’s 11.5% of your money lost in commissions in one year.  Think of it this way you just took an 11.5% loss on your retirement account all because one guy said it would be better for you.  If you would have had $10,000 in your account they would have walked away with $1,150 of your money.

Now how this guy got this trade approved is beyond me.   It all depends on your broker dealer.  Some hold to the rules tight and others are a bit more relaxed.  The company I worked with had a 3 year rule which meant the account had to be at least 3 years old before it could be switched to another account.

They put this rule in effect so situations like the one I mentioned above don’t happen to people like you and me.  The truth is though it still does.  So how can you prevent this from happening to you?

How To Prevent The Turn And Burn Scam

The first thing you need to realize is that anytime money moves somebody is making money.  It doesn’t matter if it’s inside your mutual fund or switching mutual fund companies.  They are making money when it moves.

While it may be next to impossible to keep track of every single fund in your retirement account you can ask your investment professional what all of the fees are inside of the fund itself.  By law, they are required to provide you with this information and also leave a prospectus with you.  A prospectus is a document that shows all the fees and previous performance of the fund.

Second, know that if someone is asking you to switch to another account and you have only had you current account for only a few months or a few years you may not want to switch to avoid the sales charge involved.

Finally, if someone is asking you to switch accounts and they are pressuring you with hard selling tactics, know that they can’t make you buy; this is also against the law.  If you should happen to fall into this situation contact the Securities Exchange Commission (SEC) at www.sec.gov or www.finra.gov to report these scams.

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