Churn & Burn: The Oldest Trick in Finance

Churning is the term applied to the unethical and illegal practice of a broker conducting excessive trading in a client’s account, primarily to generate commissions.  The same principle applies to insurance advisors who persuade clients to constantly switch policies for identical effect.  Different product, identical crime: generating fees for the advisor while generating losses for the client.

How Regulators Prove It

Churning is not proven by vibes or client complaints alone.  FINRA relies on two quantitative metrics.  The first is the turnover ratio, calculated by dividing the total value of securities purchased in an account over a year by the account’s average monthly balance.  An annualised turnover rate between three and four has repeatedly triggered liability for excessive trading, and courts and the SEC have held that a ratio above six leaves little question about the excessiveness of the trading involved.  The second is the cost-to-equity ratio, sometimes called the break-even percentage, calculated by dividing total annual costs, including commissions and margin interest, by the account's average balance.  A cost-to-equity ratio above 20% is generally treated as indicative of excessive trading, because it means the client needs a 20% annual return simply to avoid losing money to fees alone.

In June 2026, FINRA brought an enforcement action against Reid & Rudiger LLC and several of its principals, finding the firm had operated a retail brokerage business recommending a high-volume, high-cost market-timing strategy to customers over several years.  The strategy involved repeatedly buying large equity positions, often on margin, then selling them after short holding periods to fund the next purchase.  FINRA found supervisors failed to identify or investigate accounts carrying annualised cost-to-equity ratios above 20% and turnover rates above six, both explicitly flagged as indicia of excessive trading.  This is not a historical curiosity from a 1990s boiler room.  This happened in 2026, under a regulatory framework, Regulation Best Interest, specifically designed to prevent exactly this behaviour.

A related FINRA case makes the human cost impossible to ignore.  One client’s account carried a cost-to-equity ratio exceeding 111%, meaning that client needed to generate returns above 111% in a single year simply to break even.  Other clients in the same firm carried ratios of 69% and 67%.  Across the affected accounts, clients paid roughly US$2 million in commissions while incurring approximately US$2.7 million in losses.  FINRA Enforcement Head Bill St. Louis described the conduct as egregious churning and excessive trading resulting in significant customer losses over nearly six years, and noted the firm had built its business model around cold-calling high-net-worth investors and steering them into precisely this pattern.

Why This Persists despite Decades of Regulation

Churning survives because the incentive structure rewarding it has never fully disappeared.  A broker or advisor paid on commission, or on the frequency of product switches rather than the quality of long-term outcomes, has a direct financial interest in activity, not in stillness.  Regular BI’s Care Obligation requires brokers to exercise reasonable diligence, care, and skill in every recommendation.  A supervisory structure that fails to check its own accounts' turnover rates and cost-to-equity ratios, as happened at Reid & Rudiger, is not merely negligent.  It is a business model tolerating fraud so long as the compliance department never looks too closely at the numbers sitting in plain sight.

The Lesson for Every Client

Ask two questions of any account under active management.  What is the account’s actual turnover rate this year?  What is the total cost-to-equity ratio, inclusive of every commission, markup, and margin charge?  If nobody can answer both questions promptly and precisely, that silence is itself the answer.  Churning has never required sophistication to detect.  It has only ever required someone bothering to ask.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code