What is the consequence of 'churning' a client's account by a mutual fund representative?

Question: What is the consequence of 'churning' a client's account by a mutual fund representative?

Answer options: ✅ It generates excessive commissions for the representative at the client's expense.

• It always leads to higher investment returns for the client.
• It effectively eliminates all investment risk for the client.
• It is a required practice for active portfolio management.

Correct answer: It generates excessive commissions for the representative at the client's expense.

Explanation: Churning is an unethical and illegal practice where a representative excessively trades in a client's account primarily to generate commissions, without a legitimate investment purpose. It is detrimental to the client's interests due to high transaction costs and potential tax implications.