Blind faith in your broker can be harmful for you as an investor. There are several stories of investor neglect and apathy towards their brokers that do the rounds. Important point to remember is that when you lose, the broker does not. The broker is sure of the brokerage. Therefore, you have to ensure that you know your broker well and understand his/her advantages and flaws. One of the foremost criteria for selecting a broker has to be the broker’s financial health. In the past, many investors have been left in the lurch as brokers have wound up due to financial difficulties (margin lending beyond limits combined with other stock market related issues). You can ask your broker for his latest audited net worth as submitted to the stock exchange. The higher it is the better.

It means that the broker has committed higher amounts of capital to his business and thus stands much more to lose if he violates the law. You need to keep yourself away from brokers with a tainted past as far as their dealings on the stock markets are concerned. Many a broker have been involved in scams and investors need to realise that more often than not, it is their money and shares that gets misused in these wrong doings.

A case in point is the alleged conviction of three brokers at Merrill Lynch & Co, Lehman Brothers Inc and Citigroup Inc’s Smith Barney unit. It was alleged that employees of these brokers placed open telephone lines next to the internal speaker systems, or “squawk boxes,” at their firms all day long so that day traders at AB Watley Inc could secretly eavesdrop on block orders by institutional clients. The day traders would then use that information to front run, or improperly jump ahead, of client orders, the government said. The brokers were bribed with cash and so-called “wash” trades: transactions designed simply to generate a commission, the prosecutors said. Prosecutors also alleged that the day traders engaged in front running in a number of high-profile stocks traded on the New York Stock Exchange, including Citigroup, AMR Corp, Home Depot Inc, Duke Energy Corp, Wells Fargo & Co, Cardinal Health Inc, First Data Corp, Bristol-Myers Squibb Co and EMC Corp. Hence, you need to be aware of such raw deals.

History, presence and services

The track record of a broker is of prime importance. You can seek the register of investor complaints that the broker is required to maintain statutorily. If the broker does not have such a register then it is better to avoid such a broker. You should also ask the broker upfront if he or the broking entity has any outstanding cases of arbitration or legal proceedings pending against them by the Securities and Exchange Board of India or the stock exchange.

Fast and accurate order execution is another key criterion to choose a broker. Every broker competes to render such service, as customer satisfaction will bring more business and trading volumes. Investors should select a broker with a sufficient number of marketing officers and telephone lines to handle the orders. One also needs to find out whether the broker has an online presence or interface that lets clients trade through the Internet. If yes, then it does not mater where his office is. Or else, you would want to select a broker closer to your place of work or residence. Ease of accessibility is important.

Another important aspect is documentation. It is vital since it represents the formal contract between you and your broker. It is advisable to have a copy of any document you sign. As for as after-sales services, a number of brokers are now using automatic account clearing and transfer. This requires flawless, easy-to-understand documentation that can be referred to at all times. At the same time it is even more important that the research is unbiased. It is better that investors rely on research provided by an independent entity (that is available with the broker) in order to avoid any occurrences of conflict of interest.

Your judgment, understanding

Remember that no matter what the research information says you must exercise your own judgment or research the stock some more on your own. Try and read at least more than one point of view on any stock or sector. Another critical factor is to understand where the broker is sourcing its research from, if it does not have its own research desk. Remember, the more you trade, the more the broker benefits. If you are not trading in and out of stocks very often, and if you are not too concerned about whether your trade is executed within 15 seconds or 2 minutes, there really isn’t a significant difference among brokers as far as fees and other charges are concerned.

You also need to know about the affiliation of the broker with the various exchanges. While most brokers have membership with the two largest exchanges in the country, NSE and BSE, some of them do not have both these memberships. This is an important aspect, as certain stocks are listed on only one exchange.

Some brokers, apart from equities, also provide services like mutual funds advisory, insurance and fixed income schemes. However, a word of caution: investors need to be aware of the background of the broker as far as selling and distribution of specialised products like mutual funds and insurance is concerned. Advice regarding asset allocation is an extremely specialised field and your broker may or may not have the necessary skill set to provide such services. If the broker is giving you such a service then try and see if the staff is qualified by IRDA for insurance or by AMFI for mutual fund products or by AFP for financial planning. Again, irrespective of whether you make money, the broker is sure of his commission.

The propriety issue

Ask your broker if he does proprietary trading. What percentage of his total business is made up of proprietary trading? The higher it is the more it is of concern. Because the brokers efforts are also being invested in managing his portfolio (either investments or trading or both). And he probably has less time or interest in servicing you. If he has a large proprietary trading then it is more likely his own interest may come first and not yours. You can ask for systems and procedures that they have in place for clearly segregating the two. A good professional broker may do some proprietary trading but would definitely have good systems to clearly segregate the two. For example, physically separate dealing rooms, different trader workstations and a separate dealing team. Corporate brokers are preferable over partnership or sole proprietary concerns. You have recourse to them under company law other than capital market regulations. Plus they have to meet certain networth criteria as well. It might not be wise to blame the broker for your losses, though that is often the easiest thing to do. Problems arise when you depend significantly on broker advice for your decisions. The broker is merely a facilitatory, you are in control.

?To be continued