Why Reverse Churning Does Not Create Cream From Butter

For years, firms have been using wrap products to charge an annual fee based upon the value of assets under management regardless of the number of trades, as opposed to fees per trade. In other words, wrap accounts were an effective tool to avoid churning claims because the customer theoretically could trade daily and only be charged an annual fee. These accounts are, however, giving way to a new type of customer complaint and regulatory oversight.

The new claim is known as reverse churning. In that situation, the client is placed into a wrap account, but trades very infrequently. As a result, the client winds up paying more in wrap fees than she would have with a straight brokerage, pay per trade account.