`All free rides have ended' -- Mr John Band, CEO, ASK-Raymond James, Mumbai

Rasheeda Bhagat

HE has few tears to shed for brokers whose businesses are folding up.

But Mr John Band, CEO of Mumbai-based ASK-Raymond James, is certain that brokers who give value-based advice to investors will thrive in the future.

Excerpts from the interview:

Over 900-odd brokers have surrendered their cards, and more are in the queue. Where do you see the broking community going?

The problem is that brokers are not delivering good advice to their customers; and customers do not pay for it either. Elsewhere, investors have two choices: Discount brokers with low charges like in India, or brokers who give useful advice but charge accordingly -- about 1-2 per cent. Typically, brokers have been people who invest customers' money until it is gone and then they have to go and earn some more!

So, I do not really think it is a bad thing that hundreds of people are turning in their terminals. The level of speculative trading in the market was such that few speculators were making any money. So far we had a system which was more of a job creation system for brokers...akin to horse racing!

If we move into a system where only brokers who give value-added advice to a customer will survive, that would actually be a leap forward. Obviously I feel sorry for anybody whose business disappears overnight but that is a part of the price of progress.

And Internet trading has also come in...

Internet trading enables people to make their own decisions or speculate without advice. But the vast majority of them lose money because investor awareness is not that high. Because we do not have value-added brokerage, people tend to look at who is the cheapest. It is like people buying life insurance looking only at how much commission the agent will give back.

I am not saying that this does not happen elsewhere, but at least in other countries people make their agents provide service to earn their money. With the entry of private sector into insurance; with competition in the mutual fund business and with UTI in disgrace, I think, investors are going to become more discriminating.

What kind of return should a small investor look at?

That is another big problem small investors face. For many years small investors have got used to absurdly high returns, thanks to scams; or the money was actually depreciating so fast, thanks to inflation, that they did not realise they had actually made anything; or because the Government rigged the market in their favour.

So, that happens too?

Of course. When we had IPOs where the price was rigged by the controller of capital issues, investors got a free ride. Where interest rates were very, very high, investors, for instance, in US-64 got a free ride. When the market was being trumped up beyond all reason, investors got a free ride. The problem is that all those free rides have come to an end simultaneously. SEBI is clamping down on bad behaviour so you are not going to get any benefit from that type of behaviour.

What about SEBI's own behaviour?

SEBI has a very difficult job. When it does something, it has pressure groups pulling in all directions. On the other hand, if it does not do anything, everybody complains about that too. So Mr D. R. Mehta has a pretty thankless job and I think that under the circumstances, he has not done as bad a job as people try and make out. The problem is that he surrounds himself with bureaucrats of questionable competence and yet more questionable integrity. Particularly, his investigation department and its so-called investigation of the bear cartel.

Bear cartels are mythical beings such as dragons or unicorns. People who believe in bear cartels are usually people with restricted intelligence. But bear cartels are incredibly useful to a broker to explain his poor performance.

Suppose you, as a stock broker, had advised your client to buy Himachal at Rs 1,500 and the client comes to you when the share is at Rs 100 and asks, `why did you put me into this rubbish', does the stockbroker say: `Because I am a complete idiot or does he say it is a great stock, but has been hammered down by this wicked bear cartel?'

What is worse, it appears that the Finance Ministry, which clearly does not understand details of the functioning of the market, has also chosen to believe in them.

But does anybody understand the market?

In the short term, no. Finance is a fashion business and chaps with MBAs who try and pretend otherwise will usually lose you a great deal more money than chaps with common sense who admit it.

You mentioned saving for old age. But how many people do that?

Not enough. In the US and the UK, people do. We need to do that here much more. But here, the tradition is of parents living with their children who look after them. In the US and the UK, the middle class people are increasingly realising that when they retire, the government will not keep them in the style they wish to be kept in. Therefore, they need to accumulate something for their old age. In England, people do it by buying the most expensive house they can afford and sell it when they retire and live in something more modest and they have accumulated a cash pile.

Pic.: Mr John Band, CEO, ASK-Raymond James, Mumbai

Picture by Shashi Ashiwal

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