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 later 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. One the one hand whilst retail brokerage volumes in cash equities dwindle, the large pots of retail money in India are organizing 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 US$100mn (and in few cases upwards of $1bn) 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, 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 USwealth management industry for a nearly a decade has posted a scathing online critique of the USbrokerage industry and many of the points she makes are applicable to this industry globally (see ).
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 the successful re-invention of the stockbroking model has to be around providing:
(Saurabh Mukherjea is CEO, Institutional Equities, at Ambit Capital. The views expressed here are his own and not Ambit Capital’s.)
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