How to choose a stockbroker

Put your money where your trust is

 

We take a lot of care to choose all the professionals who work for us, be it our doctor, chartered accountant or lawyer. But most of us do not take sufficient care in choosing our stockbroker. One of the most common excuse people put forth for this negligence is that since they don't know much about investment, they don't know how to choose the right stockbroker. This is a perfect recipe for rushing into a broker relationship fraught with risk. This is a grave issue, considering most people entrust to stockbrokers money they cannot afford to lose. So, it is imperative to devote sufficient time to the cause.

 

How much and what service do you want from your brokerage firm and stockbroker?

Consider first whether you want a full-service broker or a discount broker. A full-service broker will recommend particular securities for you to buy; a discount broker only places the buy/sell orders you give.

A discount broker is like a pathology lab which will conduct any test that you ask for - blood test, sugar test, X-rays and so on. But the lab guys will not provide you with any treatment for the ailment. You can treat yourself with some over the counter drug or approach a doctor for treatment. A full service broker, on the other hand, is akin to a nursing home (following the same example) that will not only conduct all the requisite tests but will also offer good treatment from a qualified and experienced doctor.

The advantage of having a full-service broker is that you have a professional on whom you can rely for services and advice. The disadvantage is that a full-service broker is more expensive (not unlike most nursing homes!). If you do your own investment research and call your broker only when you want to place an order, then a discount broker may save you considerable money over time.

 

Use referrals to shortlist your brokerage firm and stockbroker

Those who do business with a particular broker based upon an original cold call from the broker are apt to have many more problems than the person who interviews, researches, asks questions, and ensures a good match. So, go ahead and choose a stockbroker rather than the other way round. Just as it is important to see that your doctor is a certified professional from a reputed university, it is also important to ensure that the stockbroker is registered with the important stock exchanges and does not have a history of customer complaints.

Why referrals?: Referrals are one of the best ways to choose anything. Whenever we fall sick, we consult our friends and ask for referrals of some of the best doctors that are available in the city. Similarly, referrals from a friend can go a long way in our search for a good stockbroker.

But asking a friend for a stockbroker referral is a little more difficult than asking a friend for, say, a dentist's referral. There is not much that is considered confidential about a dental relationship; however, the client-broker relationship concerns financial issues, issues that are considered very private by most. Another problem with referrals is that the person making the referral may have a different set of financial goals than you do - the person who may be a good stockbroker for him may be totally inappropriate for you. Therefore, you must pre-screen your referral source.

Research your source: Ask your sources questions like how long they have used the broker, how often they communicate, if their objectives are being met, if they feel pressured or uncomfortable, services they get, if their broker is accessible, and if they get prompt explanations to their questions. Your sources' knowledge of their own investments, accounts, and stockbrokers in general will weigh heavily on how much their advice is worth.

This enables you to determine the credentials of the stockbroker and thus shortlist likely candidates. So, Sherus, if you are not already trading on the Net, go ahead and find some stockbrokers. Verify their credentials and watch this space for some other important qualities that are essential in an ideal stockbroker.

What if you don't get a good referral from any of your acquaintances? Don't worry. That's an easy way but definitely not the only one. Some of the other ways of shortlisting brokers are the stockbroker's directories that are issued by the Stock Exchange (you can easily find them in any library or the Net, which we know to be one of the easiest and most reliable sources for any kind of information), advertisement by brokers themselves - in print as well as on hoardings, news items, etc.

 

Narrowing the choice by asking the right questions

Now comes the second shortlist. Since our dealings with a broker involve monetary transactions, our selection mechanism should be similar to the mechanism used to shortlist a bank. What are the questions that come to mind before opening an account with a particular bank?

1. Is the bank safe? Does the broker have a high net worth? Is he trustworthy?
2. What is the minimum deposit the bank accepts, does it cater to high net worth individuals only? Some brokers cater primarily to high net worth individuals. Do they impose restrictions like a minimum portfolio size? Would they take the same care of your small portfolio?
3. How far is the bank from your house/office, does it have home banking/ATM facilities? Is the broker close to your home/office? If yes, you could easily drop in to his office and collect your contract notes, pay/receive cheques. But what if he is located far away? Does he provide a pick-up service?
4. What are the products on offer in the bank - vanilla savings, fixed accounts, Flexi accounts? What trading services does the stockbroker provide, just delivery based trading or margin based transactions, carry forward facility, badla financing, etc.?
5. What is the level of service provided? In case of banks, you would look for the range of value-added retail services - personal loans, loans against shares, concessions on credit cards, ATMs in other cities. Does your stockbroker provide you with fundamental research on companies or does he focus only on technical calls and some "tips"? What kind of companies does he focus on - large, liquid companies or small companies that could be potential multibaggers but are riskier and suffer some illiquidity problems? What is his track record?
6. Does the bank have a good, friendly staff to handhold you through procedures and problems and give prompt service? Securities transactions are a little complicated and can be difficult to understand for a novice, especially if things aren't explained properly. Does the stockbroker provide you with information and take time out to explain a proposed transaction until you understand? Remember that this is your investment - you have every right to understand exactly what is going to happen with it.

 

Other key factors to consider

Do you and your stockbroker share a similar wavelength? It is critical that you and your broker have a meeting of the minds and that your communication is meaningful. Your stockbroker must not pressure you. You need to keep in mind that it is after all your investment - meant to earn more money for you, not just your broker.

And, finally take a look at the rate card. Although there is an acceptable range of commissions, specific rates can vary from firm to firm. Most of the brokers also reduce rates if you give them a higher volume. So, it is important to look into this aspect.

 

More on brokerage fees

Why does a stockbroker charge brokerage? The stockbroker provides a lot of services and does so for a fee. Out of the fee he charges for the brokerage, he pays transaction fees to the stock exchange for every transaction. Also, the stockbroker incurs overheads of physical space or maintenance of a back office and ongoing research to provide timely information/advice to clients. These expenses are met through brokerage fees. This also explains the reason why a service brokerage charges a higher brokerage than a discount brokerage. So, other factors remaining constant, go for a stockbroker who gives you the best value for your money.

Happy hunting!