It has been determined by the arbitrators in a FINRA (Financial Industry Regulatory Authority) arbitration case that Wells Fargo, along with a former financial adviser Gregory Pease, are guilty of churning in a customer’s account and must pay $731,587 as compensation.
The Claim
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The claim was filed by Edward A., the chief executive of Owens & Minor, a Richmond, Virginia, area-based health care firm, and Wendy M. Pesicka on October 5, 2017.
They alleged that Wells Fargo Advisors Financial Network and Wells Fargo Clearing Services affiliated adviser Gregory T. Pease:
- Altered their risk profile on account applications
- “routinely churned” their investments
- placed them in investments exceeding their risk tolerance.
Along with Pease and Wells Fargo. Pease’s partner John P. Rauch and Rauch Pease Wealth Management have been accused of, among others:
- Fraud
- Unjust enrichment
- Aiding and abetting fraud and conspiracy
- Breach of fiduciary duty
- negligence
The Award
The award states, “Claimants allege that many of these investments were made with the sole purpose of generating additional commission or fees in Pease’s favor.”
The award document also states that Pease, for the period the complainants have identified as the timeframe of their allegations, was serving as a “discretionary account benefit administrator.”
The award, making Pease and Wells Fargo Clearing Services jointly and severally liable for the compensation, was decided by a three-person Pittsburgh-based panel. With effect from the 6th of October, 2017, they are also required to pay interest on the determined compensation, at the rate of 6% per annum, till it has been fully paid.
Of the between $6.5 million to $9.4 million and treble damages sought by the Pesickas, as well as $1.2 million in attorneys’ fees and costs, punitive damages, treble damages, and attorney’s fees were denied by the arbitrators.
Aftermath
No comments were offered by the attorneys representing the Pesickas. Spokespersons for Wells Fargo have also declined to comment.
According to his BrokerCheck profile, Pease is currently not registered as an investment adviser or broker. Raunch continues to work for Wells Fargo Clearing Services and is dually registered.
How to Spot Financial Advisor Churning
Financial advisors need to stay up-to-date with regulatory penalties and changes in client behaviors. This is especially important for advisors who work in passive portfolios. They need to ensure ongoing activity, communication, and fee validation. If they don’t, they risk losing clients. Read on to learn how to spot churning and prevent it.
In recent years, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have focused more attention on financial advisor churning. With the stock market dancing around record highs, regulators have started looking for firms that are promoting fee-based accounts and collecting fees from them without advising or managing them. Regulators are concerned that fee-based accounts will cause clients to pay more but will get less advice and service.
A financial advisor’s fee structure is an important aspect of their compensation. Using a wrap account, for example, may eliminate the incentive to churn. Wrap accounts are typically fee-based and charge 1% to 3% of the assets they manage.
Signs of churning
Some financial advisors charge excessive advisory fees and commissions. These fees aren’t transparent to customers. This is known as “churning,” and it’s particularly troubling for elderly investors. Fortunately, there are ways to protect yourself from churning brokers.
One of the most obvious signs of churning in financial advisor firms is excessive brokerage fees. SEC and FINRA rules require financial advisors to be transparent about the fees they charge their clients. If an advisor is hiding fees from clients, they risk facing legal consequences. Another sign of churning is an excessive turnover ratio. This indicates that the financial advisor is overtrading in a client’s account.
Other indicators of churning include excessive trading. For example, if an advisor’s portfolio tracks well below benchmarks, they may be trying to conceal the fact that they are mismanaging their clients’ investments. In addition, if fees are too high for one segment of a client’s portfolio, this is a sign that the advisor is trying to hide something.
Ways to stop churning
Churning is a practice that occurs when financial advisors charge their clients fees to manage their accounts but never do any buy-and-sell activity. This practice is a growing concern for regulators, who are taking steps to stamp out this practice. It is also a practice that is prohibited under current regulations, which makes it crucial that consumers understand how to avoid this practice.
The best way to identify churning is to read your account statements closely. Your financial advisor should give you notice every time he or she makes a trade, and you should be able to trace each trade back to your account. However, it is important to note that many investment accounts grant the advisor authority to buy and sell investment products without your approval. As such, it is essential that you monitor your financial advisor’s performance and make sure that you’re satisfied with their work.
If you’re concerned that your advisor is churning, contact an investment fraud lawyer. You can also contact the SEC or FINRA to file a complaint.
Common ways to report churning
Churning is a practice in which financial advisors charge customers excessive commissions and advisory fees and do not disclose the reasons for those charges. This type of behavior is known as churning and is particularly harmful to elderly investors. There are common ways to report financial advisor churning and to get your money back.
One way to identify and report churning is to check your account statements. Your account should have a system that allows you to see all of the transactions made in your account. You should always receive a notification when a trade is made, and you can review the documents to make sure it was made without your permission. Unfortunately, many investment accounts grant authority to financial advisors, which means that they can buy and sell investment products without your permission. These actions are unethical and illegal and should be reported to the appropriate regulatory bodies.
Once you’ve identified any churning, it’s important to report it and get help from an experienced lawyer.
