What is "churning" ?

Dear Kin Lian

I hope you could consider publishing this in your Blog to clear the doubts as currently I personally feel that this definition is very vague.

 

What is the definition of 'CHURNING'

Currently it seems there is no industry standards to the definition of 'CHURNING'. 

 

Scenario 1, if a investor purchased a unit trust paid 3% upfront and made profit of 10% in less than 1-2 months and decided to sell and reinvest in another fund, and does not mind paying another 3% to the adviser, is this "Churning"?

 

Scenario 2, a investor purchased a unit trust paid 3% upfront, loss 1% and sell the investments, reinvest again and pay another 3% upfront, this is definitely 'CHURNING'.

 

In some firms, they take Scenario 1 as 'churning'.    Is this the industry practise?

 

Even currently in investment platforms there are 'WRAP' and 'NON WRAP' fees.  'WARP' are those which charges as invester x% annually and when they switch there is no up front whereas 'NON WRAP' there are up-front.  Again, for 'WRAP' fees it can vary from 0.5% to as much as 1.5% annually.  Some firms take 'NON WRAP' as CHURNING, so if this is true that why implement such facility.   Must as well remove it.

 

As a long term investor, why should I go for 'WRAP' fees if I decide to just remain in 1 good fund.   By paying 1.5% annually, it deplict my value and why should I let the adviser and firm earn it.

 

Banks in the past adopt 'NON WRAP' whilst FA Firms tend to discourage it and make it mandatory to go 'WRAP'.  Why?  Maybe they need the 'WRAP FEES' to maintain their business which is ridiculous. 

 

Mr Tan, it will be good if you could maybe rope in industry experts or the blog members to comment on this.  This issue has in the past and now, caused advisers to be forced to resign and terminated because of scenario 1.

 

Concerned Investor

My view

The investor has to pay an upfront fee of 3% to 5% or an annual wrap fee of 1.5% to invest in a unit trust. These charges are rather high and depletes the return to the investor. But, they are good fees shared by the adviser and the FA firm. There is now a dispute between the adviser and the FA firm in how to share the proceeds of the fees.  

Churning is a term used to describe the activity of an agent giving advice to the client to terminating one insurance policy and take up a different policy. It allows the agent to earn the high upfront commission (of 1 to 2 year's premium) again. It harms the interest of the consumer.

It can be used to describe the activity of switching from one fund to another. In this case, the cost to the consumer is 3% to 5% of the premium, and not a large percentage. However, if this activity is carried out several times in a year, the harm can be quite large. So, it should be treated as churning also.

Investing in a unit trust should be a long term investment. The investor should keep the investment for a few years, before making a switch for the purpose of asset allocation. It should not be done earlier.

If the consumer wishes to speculate in the stock market for short term gains, the consumer should select the liquid blue chip shares. The cost of trading is only 0.3% of the invested sum and has to be paid on the way in, and on the way out. The speculation should not be made through a fund, which is for long term investment.