What is one consequence of 'churning' a client's account?

• A. Increased client trust and satisfaction
• B. Higher commissions benefiting the broker
• C. Long-term investment growth for clients
• D. Enhanced regulatory compliance

Answer: (B)

Churning refers to the practice where a broker excessively buys and sells securities in a client's account primarily to generate commissions, rather than to benefit the client's investment goals. One significant consequence of churning is that it leads to higher commissions benefiting the broker. This occurs because each transaction incurs a commission fee, and frequent trading increases the total fees the broker earns, even if these actions may not align with the client's best interests.

In contrast, churning typically diminishes client trust and satisfaction, as clients may feel that their broker is prioritizing their own financial gain over their clients' investment success. It also hampers long-term investment growth for clients, as the constant buying and selling can result in market timing risks and higher transaction costs. Enhanced regulatory compliance is unlikely because churning is illegal and can lead to penalties or disciplinary actions against the broker. Therefore, the consequences of churning primarily serve the broker while potentially harming the client's financial standing.