Final answer:
The practice described is likely a red flag for churning, a practice where securities are excessively traded in a customer's account to generate broker commissions. Churning is illegal and unethical as it can reduce the account value through high commission costs and may lead to investigations by financial regulators.
Step-by-step explanation:
The scenario described where a registered representative with discretionary authority is making trades that do not align well with the account objectives and have little profit potential, aside from generating commissions, is likely a red flag for churning. Churning refers to the excessive buying and selling of securities in a customer's account primarily to generate commissions that benefit the broker. This practice is unethical and illegal since it can erode the value of the customer's account through accumulated commissions and other transaction-related costs.
It is the responsibility of a principal or supervisor within a brokerage firm to monitor trading activity and ensure that it is in the best interests of clients. If trades are not consistent with a customer's investment objectives or appear excessively frequent, this warrants further scrutiny. Regulatory bodies such as the Financial Industry Regulatory Authority (FINRA) or the Securities and Exchange Commission (SEC) may investigate and take enforcement actions against brokers and firms that engage in churning.