Between September 2013 when the big bull market started and September 2018, it has been a time when the Nifty successfully scaled the 11,000 mark and the Sensex got closer to the 38,000 mark. Normally, bull markets are considered to be a great time for brokers in terms of business. But the sharp reduction in the number of brokers is quite shocking. The number of brokers in India fell from 9606 in 2013 to a low of just 2773 brokers in 2018. What exactly has been the reason for this 72% fall in the number of brokers in the midst of a bull rally?
One can say that the average retail investor has become a lot savvier in the last five years. The inflows into equity mutual funds; especially through SIPs has been phenomenal. The AUM of mutual funds has grown 3-fold from Rs.8 trillion to nearly Rs.24 trillion in 5 years with the equity AUM at nearly 1/3rd of the total AUM. In addition, the mutual fund SIPs (largely equity funds) has grown to nearly $1.2 billion per month. The old retail habit of trying their luck at equity trading has come down drastically in the last few years as retail investors are finding it simpler and also more profitable to adopt the mutual fund route to wealth creation. This has largely reduced the retail share of broking revenues. It puts immense pressure on the smaller brokers who have traditionally relied on retail flows.
New broking structure
The institutional and HNI broking segment is still largely well served by a niche group of brokers with the ability to offer high quality research and advisory services. The retail volumes are being split across two distinct categories of brokers. On the one hand, there are discount brokers like Zerodha, SAMCO and RSKV, who are offering a tech driven platform that has cut brokerage rates to ridiculously low levels. Smaller brokers are unable to match up to these rates. This shift is more pronounced among the more aggressive traders. Secondly, there are the bancassurance driven brokers like ICICI, HDFC, Axis, SBI and Kotak who are creaming away a chunk of the retail clients with their enticing offer of banking, demat and trading under one roof. It also reduces the touch points for small investors and makes it a lot more convenient. That is where the small and medium sized brokers are taking the biggest hit.
For small and mid-sized brokers, the mandate would be to focus on their franchise. Focus on the client relations and look to monetize this relationship in a number of ways. A holistic approach to advise such clients by deepening the relationship may be the answer. The traditional broking model is changing and smaller brokers need to adapt. That is how it happened the world over! ©