The term "churning" applies to the number of transactions your financial advisor makes on your behalf. Typically, the term is used as an accusation; an advisor is "churning" if they make excessive or unnecessary trades just to generate commissions for themselves.
Reverse churning, as you might guess, is the opposite practice. Doing nothing. Just letting your portfolio sit there. Think about your cousin, who's been playing video games in his parents' basement, ostensibly "working on his screenplay" for the past 15 years. Reverse churning.
So...is that bad? If too much churning is bad, than reverse churning must be good, right?
No, not really. While you don't want an advisor getting crazy with their activity, you aren't paying them to do nothing. They take a fee for their services. If you wanted someone to do nothing, you could have invested the money yourself and saved the fee. (Or just had your screenplay-writing cousin add "investment advising" to his daily to-do list.)
Reverse churning suggests that your advisor is taking all the fees they collect and heading to the golf course every day.
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Finance: What does it mean to have fiduc...51 Views
Finance a la Shmoop! What does it mean to have fiduciary obligation? Alright well
fiduciary refers to the responsible person, who has oversight, above a given
financial transaction, or process. That is, it is the fiduciary obligation, of the
head of a corporation's Audit Committee, to be certain that the
accounting process is handled fairly, objectively, inclusively and thoroughly [boss overseeing worker]
and there are a few other ly's in there, but well you get the gist. Doesn't it
seem strange, that some companies just seem to get into the same kind of
trouble again and again. Remember the BP oil spill, well it wasn't the first time
they'd had, an accident. You know, if you can call that spill only an accident.
What kind of oversight did they have? Any? Well some companies just have a [man carrying oil barrel
corporate culture that's run by the notion, that well, whatever isn't caught
as a crime, is legal. Lots of Wall Street stock brokerages came and went this
way. Yah, remember the Wolf of Wall Street? Kind of like that. Well what is
the obligation of a responsible party when faced with ethical dilemmas? Where
does the obligation start and stop? Should fiduciaries be held to a higher
personal standard than normal people? Yah, kind of the, you know, Harvey
Weinstein effect there. Yes, No, maybe, alright. Right, all three times. [question ABCD chart]
It's definitely yes, no, or maybe.
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