Broker cannot assure or promise returns?
First and foremost, the broker is not permitted to assure you returns of any kind. Equity investments for the short term or long term are risky in nature. It is true that equities outperform in the long run but in the short term it is tough to predict. Since the broker is only supposed to advise and execute client trades, there is no question of the broker assuring or promising returns. It logically follows that any employee of the broking house or even the RM or franchisee who approaches you cannot assure or promise returns at any point of time. If you find any RM assuring you returns on equities, you must immediately escalate the matter to the compliance officer and the CEO of the broking firm.
What if I want the broker to manage my money?
Here again, the broker is not allowed to manage money on behalf of the clients. The broker can have a separate wealth management division with a PMS (portfolio management service) license which is allowed to manage money on behalf of the clients. A broker without a PMS license is not permitted to either manage money on behalf of the client or assure returns of any kind. So, you are not supposed to give funds to your broker to manage or trade at the broker’s discretion. You can put margin money in your trading account and the broker can execute trades on your instruction.
RM tells you that F&O traders earned 14% on an average last year?
There is a difference between indicative returns and assured returns. An indicative return is just to give you an idea of what a trader or investor could have earned under certain assumptions. For example, salespersons promote their research calls by giving you analysis of how much you could have earned if you have taken all their research ideas. Remember, these are indicative returns so don’t confuse with assured returns. Brokers are neither allowed to manage money nor to assure returns. PMS Managers and mutual funds can manage funds on behalf of clients but even they are not allowed by SEBI to assure or promise returns of any kind.
You gave money to your broker in good faith and ended up losing the capital?
Do you have any recourse under such circumstances? Ideally, you must not give money to your broker or RM to manage. This is clearly prohibited by SEBI and the regulator and the stock exchanges keep educating investors time and again not to fall for assured return schemes. Clearly, as an investor, the onus is also on you to exercise due care and diligence before taking any such steps. Let us look at two different sets of circumstances.
Firstly, if the broker or the RM who is managing your account is guilty of mis-selling the product, then you can ask the broker to compensate for such losses. Quite often, in case of small losses, brokers do agree to make good the losses. For example, you may be 65 years old and high risk mid cap stocks may not be suitable for you. If the RM pushes these ideas to you then you can hold the broker guilty of mis-selling.
Secondly, a more complex situation arises when the RM has given you an assurance without the knowledge of the broker. In such cases, when you find the RM selling too hard, it is best to inform the compliance officer and the head of broking right away. Maintain a copy of the mail as a record that you have intimated the broker. Here again, you don’t have much recourse as the broker is not allowed to assure returns in any form or manage your money or execute transactions without your consent.
One place you have recourse is when the broker has executed orders without your authorization. In such cases, if you receive the contract note online and don’t raise any objection it is construed as acceptance. Hence if you find unauthorized trades, you must escalate to the broking head and compliance officer immediately. If you do not get any satisfactory response, you can then escalate to the stock exchange and subsequently via the SCORE system of SEBI.