Here’s why traditional stockbrokers are diversifying their business – BusinessToday

Over the past few years, the Indian stock market has attracted hordes of new retail investors. For example, nearly 2 million accounts were added in the month of November 2022 alone, according to market regulator, Securities and Exchange Board of India (Sebi). While that’s music to brokerage houses’ ears, it’s hard to please new-age investors, many of whom want one app for all their financial needs.

Brokerage houses, large and small, have embraced this trend. While newer brokerages lure new investors with zero brokerage fees, traditional full-service brokerages—which offer trading facilities along with other value-added services like research and distribution—are striving to become one-stop financial services platforms where you can’t just trade on markets, but also get loans, invest in mutual funds and fixed deposits, look at retirement planning or buy insurance products, among other things.

There is, of course, another reason why the big, traditional brokerages go this route. Let’s look at some figures: Did you know that there are more than 1,300 registered brokerage houses in India, according to Sebi, that offer investors a platform to trade in the stock market? Another set of data—again from Sebi—shows that the top 10 brokerage firms account for nearly half of the trade’s turnover. In terms of trading volume, the top 10 accounts for 38.7 percent and 56 percent respectively on NSE and BSE. This actually means that only a fraction of the others have a meaningful identity. And while traditional full-service brokerages are among the top 15-20 players, new players – mostly discount brokerages – have the most active users (see Bargain Bounty).

Although all the famous older players have gone digital, they have realized that pure play brokerage activity will not sustain them in the long run. So they are restructuring to adapt to the new normal where brokerage costs are zero and they offer a bunch of financial services. Value-added services, including stock market investment advisory and research, as well as overall financial planning or asset management, have become the mantra for most traditional but all-digital brokerages.

While names like ICICI Securities, IIFL, Motilal Oswal Financial Services, Axis Securities and HDFC Securities continue to be among the top 10 players in terms of number of active clients, almost all have seen their brokerage revenue share—as a share of their total revenue—decline over the years. with other segments constantly increasing their share of the total pie.

Collection pie

“In absolute terms, our brokerage revenues have grown significantly. But in the total revenue pie, the share of broking revenue is gradually declining since we have focused strongly on the distribution business and also offer marginal trade finance,” says Ajay Menon, MD & CEO Broking & Distribution at Motilal Oswal. Financial services.

For the domestic parent company, the share of non-brokerage revenues increased from 20 percent in FY13. to 30 percent in FY18, while in F1. FY23. amounted to about 40 percent. “We believe that acquiring quality revenue-generating clients and providing strong value-added services will be the key to profitable and sustainable growth going forward,” says Menon.

Similarly, for ICICI Securities, which was once the largest brokerage in terms of active clients, the share of revenue from brokerage services has fallen to less than 40 per cent from over 58 per cent in 2020-21. Interestingly, this was a conscious effort by the brokerage firm behind ICICI Bank. “And the competition told us that we can’t be what we were and that we have to change. It is in this context that we have started our transformation,” says Vijay Chandok, MD & CEO, ICICI Securities. “Instead of just providing capital services, we decided to focus on three zones of opportunity: savings, investments and asset management; distribution of protection services (health and life resources); and loans (all types of loans, credit cards, etc.)”

Incidentally, ICICI Securities was among the first players in the brokerage arena to embrace technology decades ago and offer its clients a digital trading platform through its website. So, while some might say that it was easier for them to adapt to the new normal, others also embarked on the journey of transformation in a stable way.

Take Axis Securities, for example. As much as 70 percent of its top line comes from the brokerage business, although it is trying to change the mix by improving its product offering. “We want our products to have a bigger revenue pie, complementing pure brokerage transaction fees,” says B. Gopkumar, MD & CEO Axis Securities. “We see offering quality products as the way forward for brokerages that want to increase their revenues. As a full-service brokerage, we want to provide our clients with a range of investment options that they can choose based on their risk profile.”

For IIFL Securities, the share of brokerage revenue has been between 42 percent and 49 percent over the past five years, even as it continues to focus on offering customized services and a diverse product suite, along with quality research. “While a discount brokerage is a good place to start one’s investment, to build and preserve wealth, investors are turning to full-service brokerage and advisory firms,” ​​says R. Venkataraman, Chairman, IIFL Securities. For long-term sustainable wealth creation, investors are happy to pay a small advisory fee, he adds.

Pricing power

Fee-based income from segments such as distribution, lending and advisory is the most common form of diversification sought by brokerages because they believe there is sufficient demand for such services, especially at a time when markets are seeing a steady influx of new investors. “There are different ways for brokerages to diversify and increase their income. This could be through building various distribution businesses like mutual funds, debt instruments, insurance, NPS (National Pension Scheme) and other such products that can help clients in their financial journey,” says Ashish Rathi, Resident Director at HDFC Securities.

For ICICI Securities, distribution accounted for around 18 per cent of revenue in Q2FY23 and the brokerage is targeting a much higher share in the coming times. Meanwhile, Axis Securities’ Gopkumar believes that compared to discount brokerage firms, traditional brokerages are in a much better position to charge clients a fee given their expertise and array of offerings. “As a full-service brokerage, we are well-positioned, given that retail investors currently require assistance due to low financial literacy and penetration levels in India. With most independent brokers building capabilities around customer education and offering the right investment products, they will always have an advantage over discount brokers,” he says.

This assumes significance as, according to Sebi data, depositories NSDL and CDSL cumulatively added 1.8 million demat accounts in November 2022, bringing the total number of demat accounts to 29.9 million in NSDL and 76.2 million in CDSL . The concentration factor also needs to be taken into account as the share of the top five brokerage firms in the trading volume in the current financial year till November was pegged at 40.8 per cent on the BSE and 25.2 per cent on the NSE. Further, the share of top 25 and top 50 brokers was fixed at 71.3 percent and 80.7 percent respectively on BSE; and 60 percent, or 77.2 percent, on the NSE. Simply put, independent brokerage firms have a loyal and steadfast client base with the vast majority even willing to pay for quality research and advice.

Venkataraman of IIFL Securities believes that “mature investors looking for alpha or long-term wealth creation advice will not mind spending for services with a full-service broker or wealth manager… We at IIFL will continue to focus on full-service broking and advisory services for the mass affluent segment”.

A positive future

ICICI Securities’ Chandok has a positive outlook and believes that structurally the brokerage industry is in a great position. “The demographic is young and everyone is a digital native. In addition, their savings are more likely to go into financial assets, compared to their slightly older counterparts who preferred physical assets like gold and real estate. There is also the story of India’s growth. For the next five years, the structural overtones are very constructive,” he says.

By the way, all full-service brokerages are banking on the ‘financialization’ quotient, and so their apps currently offer everything related to investing—equity, debt, mutual funds, bank deposits, insurance, retirement, loans—not just platforms for buy or sell shares.

Experts also believe that while many new investors will begin their investment journey with discount players due to the low cost of trading, a large number will migrate to full-service ones for value-added services. “As the Indian economy grows rapidly, more investors and mass affluent clients will seek advice and there is plenty of room for full-service brokers, while discount brokers will also have plenty of room to introduce investing and trading to new investors,” says Venkataraman.

But full-service players will have to take into account the fact that their discount partners are also looking at different models to generate a steady stream of revenue, and value-added services can also be offered in a disaggregated way – pay if you use them. Since both types of brokerages can coexist in the brokerage space, healthy but aggressive competition can only be good for investors.


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