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Jaago Grahak Jaago

SEBI's new rules could bring investors some relief from unscruplous advisors and brokers

For anyone who is looking to make some quick money on the stock markets, these are cheerless times indeed. Where ever one looks, there is bad news. As I wrote a couple of weeks ago, it's times like these that that are actually good for long-term investors. And the way it looks, things are going to get even better. Inflation, elections, oil prices, a global recession—there are any number of reasons that will keep creating better and better long-term investment opportunities.

The other day I heard someone proclaim on TV that things always look the darkest just before they get brighter. I thought to myself that while this undoubtedly sounds like a wise thing to say, one could surely know only in hindsight when things actually were the darkest. From here on, they could get better, or they could get darker and then get better. Later on, you will be able to shake your head like a wise man and point out exactly at which point things were the darkest but right now the statement is useless because it doesn't help us figure out whether things are the darkest now.

Meanwhile, the truth remains that individual investors are far more likely to lose money due to following bad advice rather than directly due to macro factors. In the last two or three years, there has been a huge expansion in the number of people who are investing in stocks and mutual funds. Many of these new investors have been attracted by the apparent ease with which stock investors have made money over these last few years. Inevitably, this new and relatively inexperienced investor population is being served by a rapidly expanding set of financial intermediaries like stock brokers, sub-brokers and distributors of other kinds of financial products. Like the new generation of investors, these new intermediaries too have been attracted by the apparent ease with which existing intermediaries have been making money.

This is a common combination—investors chasing quick profits are being served by intermediaries chasing quick profits. In my experience, this combination has proven lethal to the financial health of many investors. The immediate cause of this is that the advice and recommendations given by intermediaries is completely tuned to maximising their own short-term profits, regardless of what is really in their client's interest. That's the way markets are supposed to work, aren't they? Not really. That's the way unregulated wild-west markets work.

A couple of days ago, the market regulator SEBI brought out a set of regulations that cleans up a lot of grey areas regarding the operation of financial market intermediaries. If you are a stock investor who relies on advice from your stock broker, then you should familiarise yourself with the rules governing such advice. In practice, there are a few things that investors are generally unaware of. One is that for practically all legal purposes, the sub-broker you are dealing with, his broker, and all their employees are intermediaries between you and your transaction. The veracity of anything that they tell you is subject to the securities laws and regulations of the country.

The consumer-awareness TV ads that tell you to 'Jaago Grahak Jaago' are undoubtedly in the correct spirit. However, it surely makes at least as much sense to apply the principle to someone who is advising you about thousands or perhaps lakhs of rupees than it does to someone from whom you are buying something worth a few hundred rupees.