Turnover at the Top of the Board
Alan, your firm's top producer, has a 78-year-old retired client, Mr. P., with a $600,000 account. The new account form lists "income and capital preservation," moderate risk tolerance, and "no speculative trading." Over the past 14 months Alan has executed 58 trades, with total purchases of $4.4 million and total sales of $4.3 million. Commissions and markups total $186,000. The account is down 12% while a comparable balanced benchmark is up 6%. Alan says Mr. P. calls him several times a week, "knows what he's doing," and signs every confirmation. Mr. P.'s son has just written to the branch saying his father "doesn't know what's happening" and has been "kept in the dark." You are the branch principal conducting the annual review.
1. Run the numbers. Is there a quantitative case for excessive trading?
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Annualize first; the raw figures flatter Alan.
Turnover rate = total purchases ÷ average account equity, annualized. $4.4M ÷ $600K = 7.33 over 14 months, or roughly 6.3 turns per year. The commonly used red flag is above 6.
Cost-to-equity ratio = total costs ÷ average equity, annualized. $186,000 ÷ $600,000 = 31% over 14 months, or roughly 26.6% per year. The commonly used red flag is above 20% - meaning the account must earn that much just to break even.
Neither number is a bright-line violation; both are screening tools that shift the burden of explanation to the firm. Here the context is what makes the case: a stated preservation objective, "no speculative trading," a 78-year-old retiree, a 12% loss against a rising benchmark, and 58 trades in an account that has done two wires in twenty years. A conservative account running 6-plus turns and paying a quarter of its equity annually in costs is not "active"; it is structurally incapable of meeting its stated objective. Pull the trade-by-trade blotters and compare the pattern to Alan's other accounts - outliers matter.
2. Does the client's approval, frequent contact, and signed confirmations cure the problem?
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No - and treating signed confirmations as a defense is one of the most common supervisory failures.
Excessive trading requires three elements: excessive trading in light of the customer's objectives, control by the rep, and intent (or reckless disregard). Frequent calls and signed confirmations speak to control and to ratification, but ratification is weak where the rep is the one generating the ideas and the customer lacks the sophistication to evaluate them. A signed confirmation establishes that a trade occurred, not that it was suitable.
The "customer liked to trade" defense requires evidence: unsolicited tickets, documented customer instructions, a customer who is genuinely sophisticated, and a strategy that fits the stated objective. None of that is present - the objective line says preservation, and the losses say the opposite.
As a supervisor, do not convert the confirmations into your own defense either. If your transaction review consisted of initialing a blotter, the question will be whether your review was reasonably designed to catch turnover and cost-to-equity outliers, not whether the paperwork was complete.
3. What do you do now, before the son's letter becomes a claim?
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Treat the letter as a complaint the moment it arrives - log it under your Rule 4513 written-complaint record, and evaluate whether it is reportable under Rule 4530 (theft, misappropriation, and forgery allegations are the classic reportable category; suitability allegations generally are not, but confirm the current rule text and your WSPs).
Then: (1) freeze new trading in the account pending review, with a principal-level explanation to Mr. P.; (2) obtain the full trade history and reconstruct the strategy; (3) escalate to compliance and counsel with your turnover and cost-to-equity work attached; (4) check whether Mr. P. has other accounts at the firm and whether other clients of Alan show similar patterns; (5) consider whether restitution is appropriate - often the cheapest and most credible resolution; (6) place Alan on heightened supervision and require pre-approval of trades in retiree accounts pending the outcome; (7) review whether your own review process needs exception reports on turnover, cost-to-equity, and concentration, which it evidently lacked.
If Alan is terminated or permitted to resign, the U5 must be accurate and timely. Do not contact the son with conclusions before the internal review is complete; do confirm in writing that you are investigating.