What is a potential consequence of excessive churning in a client's account?

What is a potential consequence of excessive churning in a client's account?

• A. Increased client trust and satisfaction
• B. Higher commissions and possibly client losses
• C. Improved market expertise for the dealer
• D. Reduction of administrative burdens on the firm

Answer: (B)

Excessive churning in a client's account refers to the frequent buying and selling of securities mainly to generate commissions, rather than to benefit the client's investment strategy. This practice can lead to higher commissions for the dealer representative but often results in client losses due to increased transaction costs and potential unfavorable market positions. As the dealer engages in churning, clients may find their investments less stable and their overall returns diminished, leading to dissatisfaction and distrust. The financial implications of churning may not only affect the immediate financial health of the client’s portfolio but can also expose the dealer to regulatory scrutiny and potential legal repercussions associated with unethical trading practices. Therefore, the consequences of excessive churning include both financial strain on the client due to unnecessary transactions and ethical complications for the representative, thus supporting the argument that it leads to higher commissions while jeopardizing the client's financial well-being.