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The last thing you want to discover is that your stock broker has run into difficulties. Or that his trading facility has been suspended. The exchanges disabled Prime Securities' trading terminal following an alleged default. An investigation into its trading activities is on. Clients can no longer trade through that brokerage.
Prime has moved the Securities Appellate Tribunal against the National Stock Exchange confiscating some of its clients' funds. Internationally, there have been cases such as MF Global where clients of the brokerage lost money when it went bust.
Such issues highlight the problems investors could face if their broker runs into trouble. Sometimes, it becomes difficult for investors and clients to get their money back from the brokerages. Clients whose money is handled by brokers in portfolio-management-services (PMS) accounts can also be stuck for no fault of theirs. Says an NSE member-stockbroker: "If portfolio management services are not careful of the type of stocks and securities they buy or don't conduct background checks on companies, you always see such types of problems."
As the business is growing rapidly, issues such as the above may crop up occasionally. Portfolio managers handled discretionary assets worth Rs 5.15 lakh crore, with Rs 78,198 crore for advisory services.
Background check
With so much money invested, investors should take extra precaution to take a closer look at how and where they keep their wealth. Individuals can raise certain safeguards for their trading and portfolio accounts.
When you sign up for a portfolio service, be wary of any sales pitch that promising high returns. Don't get tempted with any of these gimmicks, as there are no guarantees in the market. Stocks are a risky business and trades can go wrong even for the best of portfolio managers.
Before you sign up for a portfolio management service, check a broker's background and whether any disciplinary action has been raised against him or her or even if there have been complaints against them.
Also, check whether a broker is registered with Sebi as a portfolio manager. The regulator is supposed to regulate such service providers. Just this one simple check could later save you from trouble.
Brokerages offer discretionary and advisory services. In the former, your portfolio manager selects stocks and transacts on your behalf. In the latter, the portfolio manager merely offers advice but carrying out transactions on that advice is left to you. Portfolio managers, however, have to keep separate accounts for each client. Hence, you should know all such transactions made specifically made on your behalf.
In a discretionary account, your fund manager takes a call of the stocks that will be selected in your fund. However, you have still to keep tabs on the transactions that take place in your account. PMS providers should give you all details about the trading in your account either online or through a physical statement sent to you every month.
Since discretionary services are usually pooled, no separate contract notes might be issued to you. So ensure you file all statements at your end. Says A V Srikanth, chief executive officer (CEO), private wealth management, Motilal Oswal: "Ideally, investors should look at their accounts every 15 days through an online account. This is updated regularly by portfolio managers and details of all transactions made on behalf of the client are uploaded with a small lag."
In a non-discretionary account, the firm has to issue you a contract note for transactions done on your behalf. Keep all these records safe. More important, have all the contract notes and quarterly account statements mailed to you at your mailing address. Take notes whenever you can and talk to your broker concerning your investment and risk profiles. File documents regularly. In case you notice any discrepancy in your statements, sort it out with your broker immediately.
Brokers might also tend to trade or churn your portfolio to generate some brokerage business. Therefore, always ask your portfolio manager why s/he has bought or sold a particular stock. Make sure you carry out this exercise once a month to keep abreast of changes in your portfolio and a check on your broker. Says a spokesperson of the NSE: "Investors should always check post-trade documents received from a broker such as contract notes, statements of accounts, statements of securities, etc. All payments made by an investor should be through a cheque on a linked bank account and in the name of the broker."
If you have any issues with your broker or portfolio management service provider which is not being resolved by your broker, you could bring it to the notice of the exchange, through their online complaint e-filing system.
Also, remember stocks tend to slip in value; hence, if the value of your portfolio dips, this does not necessarily imply your portfolio has been compromised. Still, check whether the investments suit you and are consistent with your risk profile. Let your portfolio manager know you are not comfortable with certain decisions. At the same time, allow your portfolio manager adequate time to show results.
CHECKS FOR YOUR PORTFOLIO MANAGER
- Power of attorney is the legal authority you give your stock broker to operate your demat account for the purposes you set. If you give a PoA, retain control in your hands by choosing to receive Contract Notes, quarterly statement of your accounts and demat account statement at your address.
- Do not give authorisation to make investment decisions on your behalf to the PoA holder. Also, ensure you are not giving powers to open and close an account on your behalf to the PoA holder.
- Take care to specify the period for which you are giving the PoA. Also, make sure you reserve the right to revoke it at any time, giving due notice.
- Do keep a regular check of your running account. Make sure there are no surplus funds idle in your account. Deposit as much as required. And, settle your accounts on a monthly basis.
- Try and avoid keeping your demat account with the broker, if possible, if you have signed up for portfolio management services. That will avoid any unnecessary hassle in case your broker dips into your account.
- Sign up for sms alerts from your demat account to notify you of any transactions in your account
