Let this harsh truth be perfectly understood by an investor. A Broker is there to make profits for himself, and his staff is well-trained to achieve that objective. He is not running a non-profit NGO. He is not a philanthropist either! In the appointment of a Broker you are taking the decision of your investing career which is more important than the Fundamental Analysis or Technical Analysis. You are challenging the stock market and its functioning style, which is a tough issue to crack, with your independent wisdom and on the basis of the advice of your Broker. You have number issues to tackle working in tandem with your broker. You need to judge your broker-designate well, before giving him the ‘final letter of appointment.’
Try to judge the Broker on the basis of the following information:
- ‘March from darkness to Light’ goes the wise old saying. Try to know what the broker may not tell you; what information about himself he is trying to sweep under the carpet. You can estimate this by keeping the eye contact throughout the conversation and the line of arguments that he adopts.
- Ensure that your relationship may not have conflicting interests. The market of the brokers does not provide an encouraging picture. Broker firms in thousands have closed their shops in the recent years.
Some of the areas where you need to exercise caution are:
- A broker does not own absolute responsibility to the investor. At the back of his mind, he would be constantly thinking about the scale of his payment/benefit by a particular transaction. A broker may make recommendations that are not ideal from your point of view.
- He may not reveal the complete picture of the fees payable by you. This has become the common trend with the financial institutions, which I have no hesitation in terming as ‘white collar robbery.’ For example, which bank executive informs you at the time of opening the bank account, that you will have to pay Rs.100/-(or more) if you close the account? The convenient information is revealed to you and the inconvenient one from your point of view is hidden tactfully. A broker may tell you about his 1% annual fee while explaining about a number of mutual funds and other types of investments. He may not mention anything about the transaction costs, which devour a good slice of your money. Take everything in writing; oral submissions have no authenticity.
- Do not take it for granted that a broker is an investment genius; if that were so, he should not have been in the trade of the brokers. Neither is he an economist. To open the shop of a broker, some examinations like the one conducted by the National Association of Securities Dealers, needs to be cleared, which is relatively easy. Trust not his expertise entirely. Talk like an expert with the broker, not like a novice.
- Two can’t be in the same boat, unless the destinations are the same. To buy and hold may be in your best interest (mostly it is so with every investor) but the broker doesn’t get commission for your holding approach. He is interested in moving your money to generate more and more commissions. ‘That is his stock exchange!’ Any call from the broker to sell and buy, you should corner him with ‘why?’ You must get the convincing answer otherwise reject the proposal forthwith.
- You have a weak legal position if something goes wrong with your relationship with the broker. Have a thorough look at the brokerage account opening form. (You cannot amend its clauses anyway.) You have no right to take the firm to the court and all disputes are settled through FINRA-run arbitration proceedings. Past statistics of the cases indicate that the chances of an investor emerging victorious are less and the amount of settlement of damages is even less. It is reported to be about 20% of the amount of the claim.
- Marketing tools are not the credentials. Don’t be carried away by suffixes in the business card such as Senior Consultant, Former Adviser to so and so company etc. What is important in a Broker is the basic core competency.
- Does he often refer about his clean competency? Keep the account opening forms in your suitcase, tell him that you will visit again, and have the information given to you, cross-checked from at least two reliable sources.
- What is his area of specialization? Is he thorough with foreign exchange regulations and international trade?
- Is the quality of his advice impartial?
- Is he able to provide a reliable platform for trading? Whether his internet connectivity is good? In this age of internet, fates of the trades are decided in split-seconds.
Finally, be cool. Is the person sitting opposite to you is also cool? Or is he trying to get your signatures on the account opening form today itself?
Tarry! The Sun will rise tomorrow as well!