CLIFFORD ALVARES

The last thing you want to dis-cover is that your stock brokerhas run into difficulties. Or that

his trading facility has been sus-pended. The exchanges disabledPrime Securities’ trading terminal fol-lowing an alleged default. An inves-tigation into its trading activities ison. Clients can no longer tradethrough that brokerage.

Prime has moved the SecuritiesAppellate Tribunal against theNational Stock Exchange confiscat-ing some of its clients’ funds.Internationally, there have been cas-es such as MF Global where clients of the brokerage lost money when itwent bust.

Such issues highlight the prob-lems investors could face if their bro-ker runs into trouble. Sometimes, itbecomes difficult for investors andclients to get their money back fromthe brokerages. Clients whose mon-ey is handled by brokers in portfolio-management-services accounts canalso be stuck for no fault of theirs.Says an NSE member-stockbroker:“If portfolio management servicesare not careful of the type of stocksand securities they buy or don't con-duct background checks on compa-nies, you always see suchtypes of problems.”

As the business isgrowing rapidly,issues such as theabove may crop upoccasionally. Portfoliomanagers handled dis-cretionary assets worth~5.15 lakh crore, with~78,198 crore for advisoryservices.

Background check

With so much money invested,investors should take extraprecaution to take a closerlook at how and where they keeptheir wealth. Individuals can raisecertain safeguards for their tradingand portfolio accounts.

When you sign up for a portfolioservice, be wary of any sales pitch thatpromising high returns. Don’t gettempted with any of these gimmicks,as there are no guarantees in the mar-ket. Stocks are a risky business andtrades can go wrong even for the bestof portfolio managers.

Before you sign up for a portfo-lio management service, check abroker’s background and whetherany disciplinary action has beenraised against him or her or even if there have been complaintsagainst them.

Also, check whether a broker isregistered with Sebi as a portfoliomanager. The regulator is supposedto regulate such service providers.Just this one simple check could lat-er save you from trouble.

Brokerages offer discretionary andadvisory services. In the former, yourportfolio manager selects stocks andtransacts on your behalf. In the lat-ter, the portfolio manager merelyoffers advice but carrying out trans-actions on that advice is left to you.Portfolio managers, however, have tokeep separate accounts for each client.Hence, you should know all suchtransactions made specifically madeon your behalf.

In a discretionary account, yourfund manager takes a call of thestocks that will be selected in yourfund. However, you have still to keeptabs on the transactions that takeplace in your account. PMS providersshould give you all details about thetrading in your account either onlineor through a physical statement sentto you every month.

Since discretionary services areusually pooled, no separate contractnotes might be issued to you. Soensure you file all statements at yourend. Sa s A V Srikanth chief execu-

tive officer (CEO), private wealthmanagement, Motilal Oswal: “Ideally,investors should look at theiraccounts every 15 days through anonline account. This is updated reg-ularly by portfolio managers anddetails of all transactions made onbehalf of the client are uploaded witha small lag.”

In a non-discretionary account,the firm has to issue ou a contract

note for transactions done on yourbehalf. Keep all these records safe.More important, have all the con-tract notes and quarterly accountstatements mailed to you at yourmailing address. Take notes when-ever you can and talk to your brokerconcerning your investment andrisk profiles. File documents regu-larly. In case you notice any dis-cre anc in our statements sort it

out with your broker immediately.Brokers might also tend to trade or

churn your portfolio to generate somebrokerage business. Therefore,always ask your portfolio managerwhy s/he has bought or sold a partic-ular stock. Make sure you carry outthis exercise once a month to keepabreast of changes in your portfolioand a check on your broker. Says as okes erson of the NSE: “Investors

should always check post-trade doc-uments received from a broker suchas contract notes, statements of accounts, statements of securities,etc. All payments made by aninvestor should be through a chequeon a linked bank account and in thename of the broker.”

If you have any issues with yourbroker or portfolio management serv-ice provider which is not beingresolved by your broker, you couldbring it to the notice of the exchange,through their online complaint e-fil-ing system.

Also, remember stocks tend toslip in value; hence, if the value of your portfolio dips, this does notnecessarily imply your portfolio hasbeen compromised. Still, checkwhether the investments suit youand are consistent with your risk pro-file. Let your portfolio manager knowyou are not comfortable with certaindecisions. At the same time, allowyour portfolio manager adequatetime to show results.

The recent debacle of Prime Securities highlights the problems investors could face with their portfoliomanagement services accounts. A look at how you can safeguard your portfolio in such circumstances

ILLUSTRATION: BINAY SINHA

Safeguards for yourportfolio service

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 SMSalerts from your

demat account to notify you of any

transactions in your account