A stock broker generates income primarily through brokerage fees and works on enhancing its products, services, and technology to attract more clients.
To boost revenue, brokers often provide Relationship Managers (RMs) who guide traders in their trades. But what happens when these team members don’t act ethically?
There’s a risk that these RMs may sometimes misguide traders, leading to significant losses, to meet their targets and increase the broker’s revenue. This risk escalates if the trader is new to the market and has a limited understanding of how things work.
A True Story Every Trader Should Know!
Rakesh (name changed) recently opened a trading account with a well-known full-service stockbroker. He thought that working with a reputed broker would be safe, and he was assigned a Relationship Manager (RM) to assist him with his trading needs. Initially, everything seemed perfect.
Rakesh’s RM informed him that the brokerage charges for F&O trading would be ₹20 per trade and ₹10 per trade for intraday.
Rakesh deposited ₹1 lakh into his account and was ready to start trading. However, when he tried to place his first trade, he faced an access issue. Soon after, he received a call from his RM saying, “Don’t worry, I’ll place the trade on your behalf.”
On the first day, the RM executed a trade and Rakesh made a profit of ₹2,000. The next day, the RM called him from his number and said, “I’ll give you all the trade details from this number.
When I ask for confirmation on the official number, just say ‘Yes’.”
Seeing his profits and trusting the well-known broker, Rakesh agreed. But things took a turn for the worse. The next few trades resulted in losses.
The RM explained, “This is normal in the market,” and suggested switching to commodity trading, where the brokerage would be ₹250 per lot.
Rakesh, still hoping for profits, agreed. This time, the RM didn’t seek pre-trade approval from Rakesh and instead called him after placing the order.
The RM bought 5 lots in the commodity market, using 85% of Rakesh’s capital, and the trade went against them. Rakesh’s account was not only wiped out but went into the negative due to high brokerage fees.
Now, why did the RM call from his number?
As per SEBI regulations, all calls made by brokers to clients are recorded. To manipulate the situation, the RM used his number to discuss trades and then took official confirmation to safeguard himself and the broker.
They knew there was a risk of loss and, despite this, gave wrong advice, engaged in overtrading, and charged excessive brokerage to meet their targets and boost revenue.
So, who is at fault here?
Is it the RM who used unethical means to achieve his targets, or the broker for not monitoring his actions? The trader, Rakesh, was misled because he trusted the broker’s name and the initial profits.
But in reality, the RM’s actions were designed to benefit the broker, not the trader.
What New Traders Can Learn from This?
If your RM ever calls you from a personal number and asks for off-the-record confirmations, be alert. It’s a red flag that they might be trying to bypass official procedures for their gain.
Always be cautious and ensure that your trades are in your control, not someone else’s. After all, it’s your hard-earned money at stake.
