Mutual Fund Switching


“mutual fund switching imposes new commission charges and potential tax liabilities”

Mutual funds are typically long-term investments. According to the Financial Industry Regulatory Authority (FINRA), switching among mutual fund families with similar investment objectives is usually a violation if it has no legitimate investment purpose and may needlessly impose another commission charge and increased tax liability for an investor. The continuous purchase and sale of mutual fund shares from different mutual fund families is a FINRA sales practice violation of excessive trading or “churning” of an investment account because of the increased risks and commission costs associated with the investment strategy. The mutual fund “switching” between different mutual fund families with similar investment objectives is considered violation as a conflict of interest, unless the investments in a mutual fund portfolio are a part of a bona fide asset allocation program.

In most instances, mutual funds are not meant to be traded like individual stocks because investors incur substantial charges when they buy and sell mutual funds. Brokerage firms are required to supervise the activities of its financial advisors who recommend mutual fund investments. Mutual fund portfolios should be allocated according to an asset allocation model that is based on an investor’s investment objective, risk tolerance and investment time horizon. Through the use of an asset allocation model strategy changes in the fundamental allocations would not be necessary unless there is a substantial change in the investor’s circumstance or investment objectives.

Klayman & Toskes, P.A. can help you determine whether an investment loss is the result of a sales practice rule violation concerning mutual fund switching in an investment account. If an investor suffers losses as a result of mutual fund switching they may be able recover their losses in a FINRA arbitration claim for damages.

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