When advisors churn, clients get burned

For one thing, it’s easier to churn an existing account than it is to create a new client. And when an existing client trusts you, replacing multiple contracts without cause (other than making more money) can be child’s play. But just because churning is simple doesn’t make it right. Here’s why:

• Churning is illegal. One of the quickest ways to lose your license is to churn your clients’ holdings. (Example in a second.)
• Churning is unethical. It dramatically violates the spirit of the fiduciary standard of care. Even though non-Series 65 agents aren’t true fiduciaries, I believe they should still uphold the spirit of that license.
• Churning is a reputation killer. Once it gets out that you’ve been sanctioned (or worse) for churning, clients and potential clients will realize you aren’t worthy of their trust. And they’ll share that knowledge via the Internet.

Case in point? An Illinois advisor found himself in the headlines recently for falsely claiming to be a fiduciary when in fact he was allegedly all about selling — and replacing — equity indexed annuities (EIAs).

Despite claiming not to sell investments on commission and claiming he operated under a fiduciary standard, he nonetheless replaced prior contracts he sold with 31 new EIAs.As a result, the advisor received roughly $160,000 in commissions, but his clients lost nearly $265,000 in surrender penalties and other fees.

For his efforts, the advisor is now looking at potentially losing his securities and investment-advisory licenses, as well as paying substantial fines. Plus, his state’s attorney general has brought fraud charges against him. So who needs this kind of trouble, not to mention a ruined reputation?

Don’t let this happen to you. Protect yourself by following these pointers:

• Never initiate a replacement unless there are tangible client benefits for doing so.
• “Taking the money because you can” is not a sustainable business strategy. Instead, strive to build lifelong, mutually beneficial relationships.
• Don’t just give lip service to “client’s best interests.” Live that principle every day.

Because churning isn’t earning a living … it’s burning your clients!

For more from Steven McCarty, see:

• How to set an ethical precedent
• Top 5 ‘don’ts’ for financial advisors
• Get strong: How authenticity builds closing power