What does churning refer to in finance?

Churning in finance specifically refers to excessive trading activity in a client’s portfolio, primarily driven by the intention of generating commissions for the broker rather than benefiting the client. This practice can often lead to increased transaction costs, tax implications, and ultimately a diminished return on investment for the client, as their portfolio becomes subject to unnecessary trading fees and costs.

Regulatory bodies such as the Financial Conduct Authority (FCA) in the UK closely monitor for churning because it represents a violation of fiduciary duty, where the broker is expected to act in the best interest of the client. The term does not encompass high-frequency trading in cryptocurrencies, investing in high-risk assets, or long-term investment strategies, as those concepts do not inherently involve the unethical exploitation of a client’s portfolio for financial gain by a broker. Churning specifically highlights the lack of a sound investment strategy and the prioritization of broker commissions over client welfare.