Tech use, reviews, rating: What to look for when picking a stockbroker

List your requirements and shun firms with a high number of complaints against them

In May 2023, demat account openings reached a nine-month peak, rising by 32 per cent to 2.1 million from 1.6 million in April. Consequently, more individuals are nowadays trying to decide which stock broker they should go with. 

The recent Securities and Exchange Board of India (Sebi) action against IIFL Securities, however, has sparked concerns among potential investors about the safety of their funds with stockbrokers.
 

Norms are much stricter today

Industry insiders clarify that the Sebi action was based on on-site inspections conducted during 2014-15 when regulations were less stringent, and supervisory measures were comparatively lax. Says Vikas Singhania, executive director, Trade Smart Online: “Ever since the enhanced supervision norms came into force, brokers have become much more compliant.”

He assures that in the light of the prevailing regulations, considered among the toughest globally, the chances of fraudulent activities have reduced significantly.
 

Sebi has also curtailed brokers’ access to client funds. Says Shrey Jain, founder and chief executive officer (CEO), SAS Online: “Any funds given by the client to the broker must be transferred to the clearing member or the exchange, as the case may be, eliminating any potential mishandling of funds.”

Check for reliability
 

One way to begin your search could be to ask friends and relatives about trustworthy brokers and thus arrive at a shortened list of probables. “Consider brokers who have been in business for a considerable period,” says Rajesh Kumar, chief operating officer, Tradeplus.

The list of probables can be further pared by looking up the number of complaints against each broker on the exchange websites. “For an apple-to-apple comparison between large and small brokers, look at the number of complaints as a percentage of the number of active clients,” says Singhania. Choosing a broker involves checking for two aspects: safety of your funds and the platform’s technological robustness. “Both these factors can be evaluated by the number of complaints against the broker,” adds Singhania.
 

Doing a Google search will throw up adverse orders or penalties imposed by regulators. “Avoid brokers that have adverse orders passed against them frequently,” says Aditya Gaggar, director, Progressive Shares.
 

Additional checks include verifying the broker’s registration on Sebi’s website and reviewing ratings and comments on various platforms, such as Twitter, Google reviews, and PlayStore.
 

Kumar suggests opting for a broker who is solely involved in broking as this eliminates the risk of diversion of funds. Furthermore, he recommends avoiding brokers engaged in proprietary trading.
 

Go with a broker having a decent net worth as such an entity is less likely to misuse client funds.
 

Look for a robust platform
 

Jain is of the view that for traders, the robustness of the platform should be an important criterion as any downtime could lead to losses. Gaggar adds that a broker that is able to handle a higher number of active clients is likely to be more stable in terms of its technological offerings.
 

A smooth and easy digital account-opening process is a good sign. Kumar emphasises looking for a broker with user-friendly video and text tutorials that assist do-it-yourself customers.
 

The customer support must be responsive. Says Gaggar: “Customer service becomes vital whenever a customer’s trade gets stuck for some reason.” Brokerage rates and other fees should be compared. “Nowadays, it doesn’t make sense to pay a high brokerage unless you receive some value-added service in return,” says Jain.
 

Pay heed to your requirements
 

Each customer’s needs may vary. For example, traders may need margin against collateral, while algo traders need APIs (application programming interface) to connect automatically to the broker’s platform.
 

Newer investors, according to Gaggar, might favour full-service brokers who provide research support.
 

Danger signals to watch out for
 

After enrolling with a broker, customers should check their email account and SMS at frequent intervals to see that their security and fund balances are shown correctly. “Whenever there is a debit from your demat account, the depositories send an email and SMS. If stocks were sold from your account but you did not initiate the transaction, check with your broker,” says Singhania.
 

Brokers report information about clients’ funds to the exchanges, which in turn alert clients via SMS. “Any discrepancy between the broker’s report and the client’s records should ring an alarm bell,” says Kumar.
 

Investors should also watch out for delayed payouts. According to Jain, the regulator has mandated that client payout should happen on the same day after 6 PM, provided the client put in the request before the cut-off time.
 

“When you make a request for your funds, and there is a delay in transferring them without a good reason, it could point to the broker facing liquidity issues,” says Singhania.
 

Gaggar warns that customers should watch out for any hidden fees in contract notes, such as unusual pay-in or pay-out charges, share transfer fees, etc.
 

Finally, the cost of switching to another broker is not high today. Hence, if you’re not satisfied with your broker’s technology, customer service, or there are payout delays, move to a new one at once.

Regulator’s measures to bolster client safety
 

Brokers must transfer each client’s funds (not just aggregate, but amount earmarked to each client) to the exchanges, thereby preventing the misuse of one client’s funds for another
 

Segregated margin reporting requires brokers to report all client balances, segmented by commodity, equity, F&O, etc, to the exchanges

The implementation of peak margin rules by the exchanges has limited the scope of leveraged trading

Exchanges alert clients about the funds reported by their brokers, allowing them to notice any discrepancies
 

The exchanges mandate that all client money held by brokers must be returned to the client’s bank account once every quarter

Source: Tradeplus