• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Rasheeda Bhagat

Broking, as a profession, has seen trying times. Unless the broker of yore changes his strategy, he'll be out of business.

The new millennium has hardly been kind to the fraternity of brokers. First the technology bubble burst, the Ketan Parekh scam followed, commission rates crashed and probes against corrupt and fly-by-night brokers were initiated, compelling the broking community to take a hard look at their career.

So is the Indian broker an endangered species? John Band, Chief Executive of the Mumbai based strategic investment consultancy Zoom Cortex, feels that the Indian broking community has to do a lot of introspection and change with the times.

"Like everything else, things have become more competitive in this profession too. To justify their existence in the future, brokers will have to offer a better value proposition to their clients than they've done till now. In the past the typical Indian broker invested your money until it was all gone, rather than a person who helped you accumulate wealth."

American brokers used to be like this 20 or 30 years ago. "But gradually they have become more respectable, and appreciated the need for financial saving or central wealth planning. Though there are still fly-by-night brokers in the US, the general standard of brokerages there has risen enormously. Today, they help their clients to accumulate long-term savings and I expect the same trend to develop in India. Brokers who earn their living by encouraging people to trade their money until it is all gone, will have a very difficult future."

Arun Kejriwal, chief of Mumbai based Kris Securities, agrees that the Indian broker has become a threatened species. "The fall in brokerage rates and turnover is clearly pointing to yet another shakeout as far as the broking community and cash market is concerned. I believe in the next seven months or so, about 150 to 200 brokers on the BSE and NSE combined, will either wind up or seriously consider doing so."

He feels that "consolidation will be the name of the game in the days to come. If smaller brokers get together and merge or amalgamate themselves, they will survive."

Kejriwal says that Internet trading, though getting more accepted and popular, has not really boomed. A year ago, it hardly existed, but is slowly picking up. "In the long run, Internet will affect the broker indirectly but not directly; because even in buying or selling shares through the Net, an investor requires some broking entity for back office operations, paper work, and the like."

So should the broker do research on companies and advice clients?

"With brokerage rates being what they are, brokers cannot afford to provide more than mere broking. In this cutthroat competition, the way out is an add-on or additional service to attract clients. Advice based on research could be a way, but I am sceptical about investors taking advice from brokers when they can get information on numerous web sites," he says.

But the broker does have an important role to play in sorting and authenticating information and this could be a USP in the future.

Band envisages the broker's role thus. "He will have to help the investor produce a personal financial plan and to see his/her savings and holdings in financial curves; to buy property, get children married, for retirement, and so on. But right now the majority of our brokers, instead of helping you plan your financial future, seem to be helping the retail investors spend their cash on punting." As for the bigger brokers swallowing the small, Band feels that over the next few years, the very nature of the broking profession will change. In the US, it is still feasible to operate as a small broker, by using the bigger firms' back office operations for paper work.

Kejriwal sees the futures and options segment as a thrust area of the future. Already, in 12 months we have seen a derivative volume of between 65 - 70 per cent of the cash market on the NSE."

But the problem is that only 31 stocks have derivatives and "the contract size is fairly stiff with the value of each contract being around Rs two lakh.. If the contract size is reduced and the number of derivative scripts increased to include the Nifty 50, there could be an explosion in the derivatives volume."

But Band views the F&O segment differently, and says this is not really designed for the retail investor. "Elsewhere in the world this product is used in two ways; first it is for the institutional investors to hedge their portfolio. They tend to be the people who write options. Typically a retail investor would buy an option because it gives him a lot of leverage, should the share price rise."

Writing the options is part of the business of corporate institutional investors. Basically options are a very safe way of speculating and all that an investor can lose is the money he/she puts upfront to buy the option.

"Futures, by contrast, are dangerous wares. In every other country in the world except Australia, retail investors are not allowed to deal in individual stock futures, because of the risks involved. In India we have introduced it because our old badla system was more like stock futures than options.

Rather than learn how the rest of the world tries to protect private retail investors against their own foolishness, by steering them into options market rather than the futures market, we have gone into futures market which enables brokers to go on wasting their clients money with greater vigour," he adds.

Send this article to Friends by E-Mail

Stories in this Section
There's a career beyond IT

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line