The NSE defines a ‘Sub-Broker’ as any person who is not a Trading Member of a Stock Exchange but who acts on behalf of a Trading Member as an agent or otherwise for assisting investors in dealing in securities through such Trading Members.
Registration is mandatory for every sub-broker, and they are required to acquire a Registration Certificate from SEBI. Without this Certificate of Registration, they cannot deal in securities. As per directions from SEBI, no trading member should deal with anyone acting as a sub–broker unless they are registered with SEBI. Also, it is mandatory for a trader member and a sub-broker to enter into a written agreement.
New retail investors, especially those who do not have in-depth knowledge about the stock and securities market and wish to invest their excess idle funds for capital gains should be very careful while hiring a broker or a sub-broker. As there have been many cases of brokers and sub–brokers cheating their clients, charging them with exorbitant fees and charges, or making unauthorised transactions, due to which many small and retail investors have suffered massive losses. That’s why you should be very careful when choosing your sub-broker, or a professional that can help with your prime brokerage.
As a result of this, retail and small investors should conduct their due diligence and check the following things before hiring a sub-broker.
- Certificate of Registration – Every sub–broker is required to register with the SEBI and obtain a Registration certificate. It is one of the most important checks that should be done before hiring a sub-broker is checking their registration and validity of their membership. Unregistered sub-brokers can cheat their clients who in turn might not be able to seek recourse from SEBI and other agencies on account of the sub-broker being unregistered.
- Cost and Fees – Retail investors should compare the cost and fees of a few sub-brokers and do their research before hiring a sub-broker. Often, first-time investors who do not have much knowledge about the stock and securities markets can be cheated by unethical sub-brokers who try to take advantage of the new investors’ lack of market knowledge and might be able to convince them with false promises and tall claims. Hence it is wise for a new investor to check various services offered and fees like brokerage, transaction charges, and taxes incurred on all transactions.
- Carefully read the Agreement and Power of Attorney: Many investors blindly signed agreements and the power of attorney to operate their account without reading the terms and conditions. They receive a rude shock later in the future, where their broker and sub-broker can make transactions without authorisation from their client, and the client does not have any legal recourse as they have signed a written agreement.
Investors should carefully read all agreements, power of attorney before signing them and in case they lack knowledge of financial markets, legal contracts, they should consult a lawyer or a trusted, known person who has experience of contracts or financial markets.
- Check the track record of the sub-broker – The best publicity is the word of mouth publicity, and before hiring a sub-broker, all new investors should check the track record of the brokers they might be planning to hire. This can be done by asking your friends and family who deal in stocks, speaking to the existing clientel of the sub–broker You can also ask your friends and family to recommend you a sub–broker. People will always recommend a sub–broker who operates under ethical standards, has helped them make a lot of money, and is professional in approach. No one will even suggest a sub-broker with whom he or she has had a bad experience in the past.
Investors invest their hard-earned money in financial markets with hope and expectation of capital gains that can be used for their future. With this don’t let an unethical sub–broker gamble off on your savings and cheat you off your hard-earned money. Be smart, do your due diligence and checks before hiring a sub-broker.