The recent hiatus in the Indian Bull Run will compel the stock broking industry towards changes it needs and has been silently yearning for. Forthcoming adjustments will span much expected areas such as consolidation, realignment of client acquisition and retention strategies along with drifts in regulations in conjunction with the much discussed shift between commission and fee based income.
From a peak of 21,206 on January 10, 2008 on the BSE Sensex to a subsequent decline to a low of 7,697.39 on October 27, 2008, the journey of financial markets in India has been capricious. With FII’s making a net sale of $ 10.9 bn during 2008-09 (uptil January 16, 2009) as against net purchases of $15.8 bn in the corresponding period of the previous year the bolt of volatility experienced left even experts flummoxed and raised concerns towards the ability of brokerage firms to deal with the cyclical sways of the stock markets.
The Indian broking industry is reasonably large and fragmented with 9,000 odd brokers in the cash segment and around 24,000 sub-brokers. The market share of the top ten brokers in India has remained largely stagnant in the past four years. The top five brokers in India still control around 15-16% of the market share. Historically, retail trading contributed around 60% of the market and FII’s averaged around 20%.
Key developments in this industry included conspicuous expansion in distribution pan India with greater diversity offered in financial product offerings and an increased emphasis on proprietary research output. There was a greater than before interest towards engendering a global footprint.
With over half of financial savings still in bank deposits and equity assets comprising of only 6% of household financial savings the under penetration and relative financial illiteracy continue to ensure the allure of financial services segment in the country.
The recent financial crisis though has had a dampening effect in the short term on the momentum, has along side shaken the industry to recognize the excesses built in the near decade long Bull Run and provided the opportunity to firms to rethink their likely business models in the long run.
As expansion in network no longer serves as an easy way to win customers, brokerage firms will be compelled to examine their customer retention and servicing efforts in greater minutiae. And, as the industry progresses on the growth cycle the following changes are anticipated in the brokerage industry
Realignment of Business Models between fees based and commission income
Brokerage firms in spite of their bid towards diversification derive their largest chunk of revenue from pure play securities broking. With explosive expansion in the business over the last few years the focus of the business has largely been towards opening offices, hiring relationship managers and acquiring clients. Once the acquisition has been achieved, through an attractive combination of lower intraday rates versus delivery, clients are encouraged to churn their portfolios in the market, supported by equities research and largely the client dealer relationship.
Income from broking continues to be transaction driven and hence acutely subject to the cyclical nature of the market. Downturns such as the one we are experiencing have thus compelled broking firms to weigh their decisions around the business model that they have followed over the last few years. While the model holds depth in a bull run when ‘everyone is right’ and headed in the ‘right direction’, the foundation it provides lacks the stability and sustainability in the long run.
With margins shrinking in spite of low levels of penetration in the country brokers will need to differentiate on the quality of value added services that can be provided. One such service is going to be ‘Financial Advisory’ which continues to be unorganized...