To some, investing in stocks is a very simple thing; you buy an investment just the same way you buy a product at the shop. A stockbroker in this case becomes a personal shopping assistant.  He therefore must know your taste, preference, risk class, and objective.  That in mind, one should properly scan the industry and only pick one with strings well laid in place.

A recent announcement about the closure of Francis Thuo and Co. (a stock broking firm in Kenya) sent shockwaves in the financial sector.  Most investors were left crying to the Capital Markets Authority (CMA), the Nairobi Stock Exchange (NSE), and the Central Depository and Settlement Corporation (CDSC).  To this effect, the CMA and NSE have reacted by suspending the firm for six months awaiting further announcement from the NSE, the latter being the statutory manager. 

Through the CDSC, one can still lay claim over his/her shares even after the closure of a stock broking firm.  However, all liquid cash still remains unprotected and it is at such instances that the Investor Protection Fund (IPF) comes in.  Sadly, the fund can only refund up to Ksh. 50,000 to investors; an equivalent of what the Deposit Protection Fund (DPF) would refund to a depositor at instances of bank failure/collapse.     

Currently, we have around 18 member firms, five are registered investment banks while the rest are brokerage firms.  All firms are supposed to comply with the set rules and regulations of the CMA.  There has been brewing heat from the investing public about investment banks and brokerage firms not exercising ethics while dealing with clients' accounts. Some complaints have been posted in the local dailies, while others went unnoticed.  An investor seeking anonymity even claims that the CMA, upon receipt of any complain, shelves it and never revisits. 

The past cannot be recouped but investors can take caution to avoid being victims of such losses in future.  And just like in a staff placement, one must always be willing to spare a minute and give the broker some time to prove his worth.   

The whole investing process must never start with the broker.  Suppose you walked to NSE.  Upon your review, you settle for Francis Thuo because of its convenient location. Investing should start off outside the broker house.  In such places you are likely to get unbiased information about all brokerage firms.  Although some relevant information may be biased, a lot of what you garner from the public may be of much help.   

The most informed investors are the ones who have talked to different people investing with different brokers.  Although each broker has its share of management weaknesses, it is easy to point out which weaknesses are likely to have a major impact on your investment and which ones are likely to be corrected.  For example, if a colleague tells you that the broker delayed to buy or sell his shares, it could be that the investor puts limits that are beyond the range. Such an investor cannot blame the broker because all trades are auto-executed and unless a price is not within range, an order is likely to go through.  It is however wise to check on the speed with which the broker will have your order in the system.  This is because whereas the market opens for trading at 1000hours, brokers will download the day's order by 0830hours to prepare for trading. An order reaching the brokerhouse after this time will therefore not be executed on the issue date. A sudden change in prices on that particular day could make the order delay longer than anticipated.   

In addition, check for brokers who delay issuance of cash after trading.  The normal trading cycle is T+4, that is, the settlement is done four days after trading.  One must therefore be able to get his/her check after settlement. Some brokers demand that one pays an additional two percent if they need their check drawn on the settlement date.  A client who once threatened to report the matter to the CMA got a clear go ahead from the broker; after all, it didn’t matter to them even after reporting. 

It is not possible for a brokerage firm to explain its previous deals just for you to know whom the major clients are because investing information is very confidential.  However, you can easily tell by assessing how the organization manages its firm.  If you give them a document and they start looking for it the following day, this sends a cautionary message. 

Some firms may be excellent and very organized in both deal execution and cash handling.  Limitations arise if such a firm prides itself with big retail investors and corporate clients.  If a retail investor gives such a firm the task of broking, then the investor is likely to end up disappointed.  Such firms may not give attention to personalized care as their attention is only to the larger clients. 

If you do not have time to go calling people and asking for independent opinions, talk to commentators in the industry who have rubbed shoulders with different staff whether seeking for opinion on the firm or on duty assignments.  It is such information that will help you determine if a firm is good for you or not.

A word of caution though, money not utilized in equities is as useless as that which is not yours. Closure of the brokerage firm could mean absolute loss of the cash.  Equities are however held at the CDS and therefore are not likely to be under any threat.

Francis Thuo and Co. is however not the only red flag.  Indeed, most complains that have been in the press involve a lot more firms whose management has still not come under test from the CMA.  More caution is therefore necessary as more and more investors plunge into the highest yielding asset class.