One of the dangers in trading through stock brokerage relationship managers played out to a friend of mine very recently. More than three months back, My friend had asked my suggestion for a brokerage. I referred an RM in a well known ‘money, honey’ brokerage. (Yay! I get a chance to write a kisu-kisu). My friend had gone ahead and opened a trading account with that firm.
A month later, my friend who had gone to US by then, called me from there to get the RM’s number. Since I did not have that number immediately on hand, I told him to contact later. He did not get in touch immediately and did not reveal much then.
Another month later, my friend, still in US, casually tells me he is not sure what his RM is doing with his account. I probed him further yet he did not reveal much. He said could see that some trades are being made and some losses incurred while a few were profitable. He was not very keen to get the RM’s number this time.
This week, he tells me his RM had speculated in F&O markets with his funds to the tune of Rs.40000 and all the money is now wiped out!
I feel sorry for my friend, and angry with the RM from the brokerage, but I feel my friend is also partly responsible for this mess.
After reading some of the complaints in other forums on similar lines, this is my guesstimate: In the initial days, The RM would’ve called my friend, given ‘tips’ about operator driven stocks which, ‘naturally’, would have gone up as ‘predicted’ in the short term. After four or five instances, my friend would by now be more receptive to the ‘broker knows best’ mantra. He starts to listen to the word of the broker RM. And worse lets him trade on his behalf! He reaps good profits in the initial few trades. Will he ever complain? NO!
The broker RM by now gains the complete trust of my friend. Please note here, the incentives for each are different. The RM is completely driven by the volumes he can make and by how much he can earn as commission for the brokerage. My friend should ideally be driven by long term capital appreciation.
Now the broker turns his attention to the more lucrative (for the brokerage) F &O market. He indulges in speculation - the odds of which no party fully understands. F&O world is too difficult for the lay investor to understand anyway. My friend checks his position every now and then and goes about his day to day life. Come one bad day, and all of a sudden his entire investment is wiped out.
Here are some fundamentally sound ‘tips’:
Never let the RM trade on your behalf. If you do not know what stocks to buy, just do not buy. It’s that simple.
If you come across any unauthorized trade, blow the whistle immediately even if the trade is profitable. Most of the people do not do this especially when the trade is profitable (Incentive caused bias?)
Brokerages make money when investors/speculator buy and sell stocks – the more frequently, the better. RM’s are under immense pressure to make volumes and consequently more money for the employer (not you, the lay investor). ‘Buy and hold’ investors do not make a great clientele for brokers. Hence most of the brokers encourage the gullible investors to buy and sell as often as possible.
Most of the individual investors have a full-time job and cannot devote sufficient time for stock picking but have a craving to make big money in quick time. And it is precisely this weakness that brokers or their RM exploit.
I am yet to see someone who has outsourced his ‘thinking’ while investing and yet has made substantial wealth in the market. I am not saying all those who think will make it big. Its much more complicated than that. But at least it is better to make mistakes and learn than outsource your thinking.
Now that this has happened, what is the end story?
The sad truth is, it is very difficult to ‘prove’ that the RM was at fault here. In effect my friend had given away 40K to the ‘money honey’ development fund.