For the past several decades, brokers always bore the brunt when the market went into a bear phase and investors ran away from their losses. This time, however, things are going to be vastly different. The five-year monster bull run has seen a dozen-odd brokerages turn into high-profile listed entities with a nationwide network of hundreds of branches. These include independent entities such as Indiabulls, Edelweiss, India Infoline, Motilal Oswal and Kotak as well as brokerages promoted by large banks and institutions such as ICICI Direct, IL&FS and HDFC Securities. Such high growth was possible in many cases only by employing armies of youngsters (who have never seen a bear market nor grasped the intricacies of market movements) as 'relationship managers' (RMs). The RMs are incentivised to find new investors and persuade them to open margin trading accounts, leverage their bets and trade furiously to generate fat profits for the broking firms.

This worked during the bull run; thousands of first-time investors, earning fat pay cheques with no market experience, have entered the capital market in a big way. Their main source of information has been the tips from RMs, Internet message boards and the views of 'anchor investors'.

For instance, Shyam Chatterjee writes to say that he opened a brokerage account based on the promise that a 'dedicated relationship manager' would offer him trading tips. He has lost his entire savings. Like most investors, he believes that it is the broker's job to provide winning tips and he has no responsibility. This is a clear recipe for losses, because often the brokers are not even making honest mistakes. There is malfeasance involved.

Once a dispute starts, you get a few nasty surprises. One, the employees of brokerage firms become inaccessible; two, all sticky issues are referred to the Mumbai head office where a legal expert decides the matter without reference to the RM's equation with the investor; three, the touted 24x7 customer service does not work for problem-solving and the regulator does not bother with promise vs performance; four, you realise that the brokerage firm holds all the cards. They hold the power of attorney giving them access to investors' demat accounts; they can withhold payments and even refuse to close the trading account. Worse, they have the upper hand during arbitration of disputes. They have dedicated legal experts who are familiar with the people and processes at the arbitration divisions of stock exchanges to handle these cases. On the other hand, investors are in an unfamiliar territory and slowly discover that all the helpful shortcuts offered by the RM during the good times go against them in arbitration proceedings.

How then does a person choose a broker? I believe that you must choose a broker who meets your needs, not necessarily one who has a big brand name. After all, RMs assigned to you can hop jobs very quickly, while it is no longer easy to switch brokerage firms. In fact, it may be time to look at smaller traditional brokerage firms more closely. Many of them still have customer relationships going back a few generations; they offer personalised services and make an effort to understand clients' needs. Also, they rarely dump the customer during bad times.

A few that we know have never had their terminals shut down during the worst bouts of volatility. While on-line brokerages work for a certain type of investor (who are happy with them), many others may be better off with traditional brokerages who may not have hundreds of branches, but build direct and long-term relationships with their customers.

Ankil patel(Dealer)