Deciphering Churning

Young and dashing...the young man looked every bit the Bay Street executive. A beautiful wife and home...he exuded a Canadian success story. Little did many know at that time that they were dealing with Bay Street's most notorious con man later made infamous in John Lawrence Reynolds' Free Rider: How a Bay Street Whiz Kid Stole and Spent $20 million. In just a few years, he manhandled his clients' accounts under the noses of his brokerages, who gave him plump titles and credibility. Smooth talking and charismatic, Michael Holoday was considered the ideal investment advisor by his clients until it all came crashing down. Holoday's favorite vehicle for his malfeasance was churning.

Churning, in the retail investment industry, is excessive trading in a client's account done with the intention of generating as much commissions for the advisor, while not focussing on the client's needs.

First and foremost, I'm grateful to say that the retail investment industry has improved to a point where instances of churning are becoming significantly less prevalent. Historically, the retail investment industry was filled with entirely commission (transaction)-based advisors where a commission was charged every time an investment product was bought or sold by a client. These commissions were the advisor's sole medium of receiving compensation, and they depended on it for their livelihood. Hmmm...I just realized I was talking in the past tense. Commission-based advisors still exist today and, most of them are honest and hard-working people. It is the industry, which they've adopted as their own.


Churning is rarely the reason for a clients' complaint. Usually, they complain about another aspect of their portfolio, such as losses, when churning is discovered. The problem was more common with commission-based advisors, whose drive for revenue may have interrupted their focus to give their clients the best.

A general way to assess churning: Add up the value of all purchases and sales (excluding Treasury Bills) in a year and divide the total by the value of your account in the beginning of the year. This is called turnover. If your turnover is less than 2, you are fine. If your answer is between 2 and 6, you should be conscious and start asking questions regarding the frequency of the buying and selling. Do be aware that the older you are, the closer to 2 you should be.
A more conservative method measurement of churning includes only the cost of purchases and not the cost of sales. If the answer is over 6 in this method, give your branch manager a call.