5 mins read . 19 Apr 2023
Quite often in the past, sceptics have predicted tough times for the Indian stockbroking industry. In the mid-1990s when brokerage rates started falling steeply, there were dire predictions, but brokers changed their model to a volume-driven model. Later, it was predicted that internet trading would make broking a commodity, but brokers once again adapted to the change. There were again predictions that low-cost broking would mean trouble for full-service brokers. Both have continued to carve their own niche.
With SEBI announcing the extension of ASBA (Applications Supported by Blocked Amount) facility to secondary markets, sceptics are back once again. There are already those who feel that there is trouble for brokers. In an interesting conversation, Rashesh Shah of Edelweiss, one of the most respected names in the Indian financial services industry, has predicted good times for brokers. According to Shah, the broking business will get bigger over the years due to volumes rising as well as consolidation of niche advantages. What does the future really hold for stockbrokers?
One big change that has happened in the broking industry is the clear demarcation of execution and advice. At one end, there are discount brokers with automated order execution systems. The focus is on speed, technology, and reliability. There is no advice or hand-holding and traders and investors are largely on their own. Like, elsewhere in the world, even in India there is a huge market for pure execution at low cost.
The full service brokerages must not only offer a value proposition, but also quantify it and communicate it to the clients. These could include much beyond calls and recommendations. It must cover offerings like wealth management, tailor-made financial solutions, hedging strategies, etc. As the markets get more complex, an alpha will get tougher. That is where the full-services brokers will really have an opportunity to distinguish themselves. In the US; just as you have Robinhood and Charles Schwab at the entry level, there are also private banks like Citi and Bank of America at the upper end.
As Rashesh Shah says, to survive and thrive in the broking industry for the next 10 years will need conviction, adaptability and staying power. In a way, they are all related. Brokers will see a lot of front-ending of investments in areas like technology, platforms, artificial intelligence, quality advisory, high-end content etc. The payback would be longer, and that is where staying power and conviction will come in handy. Brokers must also diversify and de-risk their business models by offering the full gamut. That includes equities, mutual funds, bonds, derivatives, private equity, wealth management, advisory services, digital services, bankruptcy related services, etc.
With the recent pause on hawkish interest rate policies by the RBI, the consensus is that India would be closer to the upper end of the interest rate cycle. That would mean, the challenge of cost of funds should now plateau, if not reduce immediately. Now comes the opportunity matrix. If India were to become a $5 trillion economy by 2028 (as is very likely), then the financial services segment has to play a pivotal role. Brokers have to play a catalytic role although the broking industry of the future may not be as simple and as innocent as the broking industry of the past.