Start with the confirmations, not the statements
A monthly statement shows what you own at month end. A trade confirmation shows each trade — the date, the security, buy or sell, the quantity, the price, and the commission or markup. Confirmations are where unauthorized trading is found, because a trade that was bought and sold within the same month never appears on a statement at all. Most firms archive confirmations online for several years; download the lot, from the beginning of the relationship, before an account is closed or restricted and access disappears.
On each confirmation, look for two things. First, the word “solicited” or “unsolicited.” Solicited means the broker recommended the trade; unsolicited means you asked for it. A confirmation marked unsolicited for a trade you never discussed is the broker putting his recommendation on your account — and it is common. Second, whether you remember approving the trade. If you cannot say yes, mark it.
What unauthorized trading looks like on paper
Unless you signed a written discretionary agreement giving the broker authority to trade without asking, every trade needs your approval before it is placed. FINRA Rule 2010 — the standard of commercial honor — and the account agreement itself are violated by a trade you did not authorize, and there is no “I tried to reach you” exception. A broker who is twelve hours out of sync with a customer in Southeast Asia and keeps the account moving anyway has a problem, and so does the firm that let him.
- Trades on dates you were traveling, in hospital, or otherwise could not have spoken to the broker
- Trades placed within minutes of each other across several customers’ accounts (visible only in the firm’s records, but the panel can order them)
- Positions bought and sold within days, with a commission on each leg
- Trades in products you have never heard of
- A pattern of activity that continued while you were unable to reach the broker
Churning: the two numbers that decide it
Churning is trading that is excessive in light of your objectives — trading done to generate commissions rather than to serve a strategy. FINRA Rule 2111 and, since June 30, 2020, Regulation Best Interest both address it, and Regulation Best Interest removed the old requirement that the customer prove the broker “controlled” the account: if the broker recommended the trades, the volume of them is judged on its own. Two calculations carry most of the weight.
The turnover ratio measures how many times the account’s value was bought and sold in a year. Add up the purchase cost of everything bought in a twelve-month period and divide by the average equity in the account over that period. A turnover of 1 means the account was replaced once; a turnover of 6 means the broker bought the account’s full value six times over. Regulators and arbitrators have long treated an annualized turnover above 6 as a strong indicator of excessive trading, above 4 as suggestive, and above 2 as potentially excessive for a conservative account — which is what a retiree drawing income has.
The cost-to-equity ratio, sometimes called the break-even rate, measures what the account had to earn just to pay the broker. Add up all commissions, markups, margin interest, and fees for a year and divide by the average equity. A cost-to-equity ratio of 20 percent means the account had to gain 20 percent that year before you made a dollar. For an account whose stated objective is income and preservation, a ratio in double digits is difficult for a firm to defend.
How to do the arithmetic yourself
You do not need to do this perfectly to know whether to send the statements in. A rough version, on a single sheet of paper, is enough:
- Pick a twelve-month window. Write down the account value at the end of each month and average the twelve numbers. That is your average equity.
- From the confirmations in that window, add up the total cost of every purchase. Divide by average equity. That is turnover.
- From the same confirmations and the statements, add up every commission, markup, fee, and margin interest charge. Divide by average equity. That is cost-to-equity.
- Repeat for each year of the relationship. A pattern over several years is far stronger than one bad year.
Where the fees hide
Commissions are printed on confirmations. Markups and markdowns on bonds and over-the-counter stocks are often not — the price you paid simply includes them, and the confirmation may say only “we acted as principal.” Mutual fund sales loads, annuity fees, and advisory fees appear in different places again. Margin interest shows on statements, usually in a section nobody reads. If the numbers on your sheet look low but the account went down in a year the market went up, the fees are probably somewhere you have not looked; the firm’s commission runs, which the panel can order produced, will show them all.
The pattern that matters more than any single trade
Arbitrators look for a story the numbers tell. An account that was “repositioned” every few months into a different set of the same kind of product; a bond ladder sold and rebuilt annually with a markup each time; a mutual fund sold at a loss to buy a different fund in the same family, with a new load; a balance that fell steadily while the broker reported “activity.” Each trade may have a plausible explanation. The pattern usually does not.
When you have marked the confirmations you did not approve and done the rough arithmetic, send it all in. The analysis is finished in our office, from the documents; distance does not enter into it, and the review is free.
Key takeaways
If you remember six things
- Confirmations, not monthly statements, show unauthorized trading — download them all before access disappears.
- Check whether each confirmation is marked solicited or unsolicited, and whether you actually approved it.
- Turnover ratio: total purchases in a year divided by average equity. Above 6 is a strong indicator; above 2 can be excessive for a retiree.
- Cost-to-equity: all commissions, fees, and margin interest divided by average equity — what the account had to earn to break even.
- Regulation Best Interest removed the “control” requirement; recommended trades are judged on their volume.
- The pattern across years matters more than any single trade. Send the documents and let us finish the math.
Questions
Asked most often
My broker says all the trades were “discussed with me.” Is it my word against his?
Rarely. The firm keeps records of calls, notes, and — under FINRA rules — the time each order was entered. Confirmations marked unsolicited for trades you never asked about, and trades on dates you could not have been reached, speak for themselves.
Is there a turnover number that automatically proves churning?
No single number is automatic. Annualized turnover above 6 and cost-to-equity around 20 percent are widely treated as strong indicators, and lower figures can be excessive for a conservative retiree. The account’s stated objectives are always part of the analysis.
I only have the last two years of statements. Is that enough to start?
Yes. Send what you have. The firm is required to keep account records for years, and the arbitration panel can order the rest produced.
Does it matter that I was hard to reach because of the time difference?
It helps you. A broker who cannot reach a customer is required to wait, not to trade. Activity that continued while you were unreachable is evidence, not an excuse.