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Investments - Unsuitable
Retired Investor Gets Trolled by His Broker
by Howard Haykin
Over a 2-year period, a broker with Cape Securities excessively traded three of his customer’s accounts – all belonging to an individual who had retired 7 years earlier. Apparently in need of cash, the Columbus, GA-based broker generated $63,000 in commissions and trading costs, along with $40,000 in portfolio losses.
WHAT DOES EXCESSIVE TRADING LOOK LIKE? According to securities regulator FINRA, the customer’s 3 accounts (with average combined equity of ~$131,000) had all the tell-tale signs of excessive trading.
- Portfolio Turnover Rates … for the customer’s 3 accounts were 10, 8 and 7.
- Rates typically range between 0 and 1, but can be higher in actively traded accounts.
- Rate is computed by taking acquisitions or dispositions in an account, whichever is greater, and dividing it by average monthly assets in that account.
- Cost-To-Equity Ratios … for the customer’s 3 accounts were 53%, 44% and 37%.
- Ratios in excess of 20% generally indicate excessive trading. [FINRA Case #2014039091903]
- Ratio is obtained by dividing total expenses by average monthly equity.
- Commissions and Trading Costs … for the customer’s 3 accounts totaled $63,000.
- Overall Losses … for the customer’s 3 accounts totaled $40,000.
- The broker recommended almost all the trades in the customer’s accounts.