Selecting a broker

My take on Brokers:

There are 3 kind of entities in this business. One, traditional broking companies like Karvy etc. Two is a bank that does everything including being an AMC. And three, the new age tech companies like Zerodha.

Status quo benefits the first two, and disruption benefits the 3rd one.

For traditional broking companies, less said the better. These are the companies that monopolised broking business before tech companies came and demorcatised it. Success of their business hinged on access to information (the same model that some of our infamous superstars had in the past) and protecting it from getting out. When your business benefits from control over information, its not surprising that almost all POA related scams are related to such entities. Their business growth now depends on their openness for a mindset change.

The second entity, the legacy bank, wants you to open a bank account with them while you open a demat account and also cross-sell you insurance and other low yield instruments. These guys are banks first and have a captive audience so they think of it as their strength. Flip side is that their other businesses remain in the shadow of big brother, the bank itself, for the longest time till the sharply focused and no-frills competition knocks on their doors forcing them to do something about it.

The ecosystem approach, or having to integrate things within a behemoth introduces complexity and as a result nothing works efficiently. The bank AMCs don’t deliver on the integration that they think is their strength. They are slow and not as nimble because of this reason.

There should ideally be reduced costs for the customer, having a (supposedly) seamless business spanning many related functions or verticals, but in reality, they are more expensive. Their service staff is wanting to sell you something or the other in every interaction. Their service, the elusive and oft-changed RMs, the so called ‘consultancy’ that seems like designed to justify their higher costs because it doesn’t deliver.

But their biggest failing, by far, is lack of transparency, which is, indirectly counting on financial un-savvyness on the customers part to benefit their business, for as long as the systems allow it.

Talking about transparency, these businesses come across as reluctant to implement new regulator guidelines and are not transparent. They basically always wanted you to sign a POA. When i opened my last account with a legacy DP, they told me that not signing a POA is not an option if i am not opening the account online.

SEBI keeps emphasising that POA or now DDPI is a voluntary choice and DPs can’t force or refuse to open account but in absence of enforcement, DPs always find a way out. They want to tell you minimum things. Download a post-DDPI account opening form from a legacy business and you may still find word POA somewhere in the form or instructions.

It may appear like mal-intention, but its just mindset and the complexity ensuing from their business model. Everytime a new set of rules come, they have to do changes across all verticals and also train people down the rung. It’s difficult. In my interaction with people from one such company, i found they didn’t think DPPI or even POA was voluntery even if it was clearly mentioned in the form.

I saw a whole write up on DPPI on Zerodha as soon as SEBI announced it, in fact that’s where I learnt about it, and they updated all their articles to reflect that change (and mentioned your priviledges as a customer in straightforward manner). Good luck finding the same on Bank AMC websites.

So the mindset take out from this is: I have ticked all the boxes on paper to comploy with the regulator but in reality i will go slow implementing the rules because older regime or status-quo benefits me…i will rather wait till the time i absolutely have to do it or can’t find a work around. A bit like walking south when your destination is north.

Lastly, the 3rd one. The tech companies are modern, transparent and they facilitate and empower their customers, not by their own choice perhaps, but because their business itself is disruptive.

They tell you everything and how to do it. Their family accounts talk to each other and you can just gift shares in a minute. If you want to leave them, they help you leave them too. In my mind, they have everything that customers want. Any problem, you raise a ticket, in a cold but effective way.

All is not great at all tech companies, some are better than others. As to which ones are better, to each their own. My experience with one of them has not been good and the other one is really good. OTOH, not everything is bad at Bank led companies as one of them has been really trustworthy for me. They don’t want to tarnish their image for some small amount unlike traditional brokers. Risks attached to POA etc has proven to be a case of subjective perception rather than reality in this case.

Comparing Zerodha and Groww:

I will choose Zerodha because they are transparent.

One very simple test of their attitude to business: Try Googling “how to transfer shares from one demat account to another” or something like that.

The Groww article that you get is about how to transfer shares from other brokers to Groww.

The most prominent Zerodha write up that comes up is about how to transfer shares from Zerodha to other brokers.

It tells a lot.

Zerodha doesn’t do much of marketing talk whereas Groww sugar coats. Zerodha support pages tell you about your privileges. In Zerodha, you can link family account. You can gift shares immediately. You can close your account online and not by having to send a hard copy to them.

Groww handles mutual funds and other products on the same platform so they can’t implement a lot of simplicity like Zerodha can.

Zerodha owner dissuades you to invest in equities in turbulent times. Who does that? Well, you can call it smart thing to do but even then…

Tips:

Have your names on PAN and address ID (Aadhaar/Passport) match each other 100%. Same with the nominies. Ensure Demat/Trading/Bank account names are consistent with each other. Remember that human life is measured and these entities will benefit from exactly these things when our descendants come forward to claim what is rightfully their’s. One keeps wondering how much unclaimed money is lying in these banks.

Open an individual account with nominees in place. This will allow you to register for CDSL easiest and you can control your holdings fully, can freeze-unfreeze them or easily transfer them.

Open your Demat with CDSL. Its easy. NSDL online operation is much complicated.

A joint account is a great idea too, along with nominees but its a bit inflexible because for online operation you will have to go through DP.

Try not to have trading account, demat account and bank account all with one guy. Especially if you do derivatives and margin. But if you do, its not a problem.

If you don’t do margin and detivative, have it disabled. With HDFC securities it is already disabled if you didn’t provide income proof. Zerodha has a kill switch.

Remember that cold tech may not be friendly for some because it blindly follows rules. So if you want the comfort of traditional service, banks are good places for that.

Also, having red tape and checks and balances can be a positive thing from safety point of view. I like HDFC Bank for this reason. If there’s one place where being conservative works, it’s finances.

Don’t go for names that sound like mithaayi shop or have had their names tainted in the past. Scammers are not good for our money.

Disclosure:
I have a demat account with HDFC securities and they have been 100% trustworthy and extremely helpful. I have another account with Zerodha and they are superb. I wish my first broker could be as transparent as the other.

Most of all, both these entities come across as companies with a culture, of whatever kind. They come across as organic entities. This relates back to ‘Zerodha owner dissuading you to invest’ point that i made.

I prefer these two over Groww despite my praise for new age tech companies. Its the nuances that matter.

PS: As i post this, Zerodha has sent me a new account CMR with a wrong name on it