There was a time a decade or so ago when I used to believe that the retail and institutional brokerage business models were very different. The former was more focused on helping small, relatively uninformed investors make speculative bets whilst the latter revolved around assisting well informed and well equipped investors make long-term investments. However, as the years go by, not only are these two business models converging, they are also facing a real risk of disintermediation by technology. That in turn is posing existential questions to the stockbroking community around the world, and it is not obvious that stockbrokers are being able to answer these questions.
To begin with, let's dwell upon the convergence between the retail and institutional brokerage models as this is especially apparent in India. On one hand whilst retail brokerage volumes in cash equities dwindle, the large pots of retail money in India are organising themselves into family offices with professional money managers. When my colleagues in the Private Client Group of Ambit take me to meet these family offices, the questions I have to answer are similar to those that I face when I go to meet a large mutual fund in India or a large pension fund in the US. So whilst as per Sebi's classification, these family offices are still counted as “retail”, there are, I would say, at least 30 large family offices in India, each managing equity portfolios upwards of $100 million (and in few cases upwards of $1 billion) which function exactly like institutional investors.
On the other hand, institutional equity investors in India, bereft of equity inflows for nearly three years now, have had to turn to create tracking instruments for the retail community around gold, the Nifty and around the S&P500 to keep the lights on. With a few notable exceptions, the fundamental value proposition of a high quality professional managed equity investment house in India is not finding takers. Increasingly, ultra high networth families in India are choosing to in-source their wealth management to their personally managed family offices.
In this process, stockbrokers too are getting disintermediated. The stockbrokers' core offering of research and execution is now easy to access on a low cost basis from the internet (and this is as true now for retail investors as it is for institutional investors). Furthermore, this disintermediation is taking place around the world. In my latest trip to the US, I could not help notice just how few retail brokerages are visible on the main streets of the smaller American cities (this at a time when the S&P500 is hitting record highs). A friend of mine who has worked in senior roles in the US wealth management industry for nearly a decade has posted a scathing online critique of the US brokerage industry and many of the points she makes are applicable to this industry globally (See http://wealthally.com/why-wire-houses-will-go-down/).
In the UK too, retail brokerage branches are all but dead and I have little doubt that the same will happen in India in due course. This is one of the reasons why most of the large Indian retail stockbrokers are frantically trying to re-invent themselves as gold loan lenders or home loan providers.
So, how can stockbrokers stay relevant? The core to successful re-invention of the stockbroking model has to be around providing:
* Clients with services that they cannot access themselves. For example, giving clients access to credible experts across various domains (politics, forensic accounting, telecom, oil and gas, pharma, retail, etc) is a value-add service that will find takers. Moreover, thanks to technology, the insights of these experts can be streamed straight into the clients' trading terminals
* “Expert systems” which mechanise the basic portfolio allocation and then stock selection decisions for the investors. So, as a retail investor myself, I would love to have access to an online tool which takes as inputs my basic details (age, income, family status, risk profile, etc) and then gives me, first, a portfolio allocation across equities, bonds, real estate and then within equities uses a smart algorithm (akin to the good and clean models that we use at Ambit) to give me a list of, say, 50 high quality small- and mid-cap investments. The final decision is left to me (or, were I so lucky, to my family office) but what the broker has done is to provided high quality technology enabled tools to aid the decision-making
* Risk management services actually advise the client against over-trading or loading too much risk into his portfolio. So, if for example, I am betting 40 per cent of my equity portfolio on one stock, the online brokerage platform should produce a pop-up warning me of the risks of doing so and suggesting diversification strategies. Such risk alerts, fired in appropriately, can fundamentally change the relationship between the broker and his client from one based around distrust and suspicion to one where the broker benefits alongside his client.
Saurabh Mukherjea is CEO, Institutional Equities, at Ambit Capital. The views expressed here are his own and not Ambit Capital's.
This column first appeared in http://shop.valueresearchonline.com/store/default.asp?chkid=1&active=wi&storepage=wiindia&subscribe=subscribe">Wealth Insight, September 2013.