On D-Street, old-school brokers are fighting back
Premium- Traditional brokers are updating their playbook to meet the discount broker challenge
They have seen it all on Dalal Street. From the time trading would open for only two hours in the afternoon at the Bombay Stock Exchange ring to the high of the Sensex closing above 2,000 for the first time in 1992, from the crash fuelled by Harshad Mehta’s great game to the pandemic-led boom in capital markets. But in the last five years, the full-service traditional brokers—once the final word on equity markets—have also seen the rules of the game change irrevocably. The digital disruption led by pioneer discount brokers like Zerodha, Upstox and Groww has left them behind.
According to data from the National Stock Exchange (NSE), in the last two years of the pandemic, zero broking or discount broking firms have on average added lakhs of unique investors month-on-month. The top five brokers today in terms of active clients are all discount brokers.
Discount brokers work through online platforms, and charge a flat fee on transactions, which is significantly less than what full brokers demand. Unlike traditional brokers, they do not provide advice or guidance, but simply execute orders for clients.
“Today everyone is a discount broker or at least has some plans that offer discount broking. You will be hard pressed to find someone who has not reduced their brokerage fees," says R Venkataraman, co-promoter of IIFL Group and chairman of IIFL Securities. Even a top bank-based broker like ICICI Securities, which had never reduced its brokerage, is offering plans with 10-30 paisa brokerage now.
In the last couple of years, promoter-driven brokers like IIFL, Motilal Oswal and Angel One have tried to outflank new-age brokers, who have leveraged technology to disrupt and democratise stock investing. Through a series of interactions, Mint tried to understand the new playbook of the promoter-driven traditional brokers.
Money is personal: Motilal
In the late 1980s, two chartered accountants, Motilal Oswal and Raamdeo Agrawal, in Bombay struck up a friendship during shared cab rides and ended up starting Motilal Oswal Broking. Unlike most brokerages of the time, this was not a family affair. Today, it has transformed into a full-service financial services firm with broking as a mainstay. In the 2020 fiscal, Agrawal gave up his role as joint managing director to become non-executive chairman. The roles are clear. Oswal is responsible for all things related to the business and Agrawal is responsible for research and advisory. Motilal Oswal Financial Services Ltd has consistently maintained a 2% market share and managed to hover at either ninth or tenth in the ranking of top brokers.
What does the future hold for them? “We have said this before, and we are saying it again. We will never become an only-discount brokerage firm. Finance and money are deeply emotional subjects for Indians. They need that personal touch which can come only through a dedicated manager," says Oswal, founder, managing director and chief executive officer, Motilal Oswal Financial Services Ltd.
“Unless you are betting your money in a casino, you will need advice. It isn’t that we cannot facilitate end-to-end digital transactions but that is not our only offering. We are phygital brokers, physical plus digital," he says. While the pandemic forced companies to spend more on technology, Motilal added 75 branches and 2,000 sub-broker or franchises.
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Discount brokers, says Ajay Menon, CEO, broking and distribution, Motilal Oswal Financial Services, are like tuition classes. “At some point, investors will move to college—by which I mean the ‘full-service brokers’ for overall wealth management," says Menon. On an average, in an entire year, a single client spends ₹6,000-8,000 on Motilal’s services.
According to the firm, this business model is working for them. “We successfully added 8.8 lakh clients in FY2022, taking the total retail client base to 28.5 lakh," said Motilal Oswal in its annual report for the fiscal ending 2022. Over half of the firm’s total revenue of ₹4,320 crore came from the broking business. It made a profit of ₹1,311 crore.
Little bit of both: IIFL
The IIFL Group, set up by Nirmal Jain in 1995, has hedged its bets. It has a unique distinction of having a full services brokerage firm —IIFL Securities —as well as a discount broking firm 5paisa.com. Both are demerged and separately listed entities. “This has helped us in catering to the new digitally savvy clients as well as ensuring that our legacy clients still remain with us," said Venkataraman.
As of March 2022, the discount broking arm 5paisa had a retail cash market share of 3.5%. It benefitted from the pandemic-led influx of new customers, and today it services 18 lakh clients.
In the fiscal 2022, 5paisa registered a 27% growth in clients, which is roughly 4% of the incremental clients across the broking industry. Profit stands at a modest ₹14.9 crore and revenue at ₹298 crore. Its broking income was up 56% year-on-year to ₹36 crore, while allied income was up 163% year-on-year to ₹32.6 crore. The cost of client acquisition has remained steady at ₹768 per customer.
“In previous quarters, investment in technology, branding, marketing, etc, led to subdued profitability, but, going forward, incremental cost is expected to be less than incremental revenue. Expect cost structure to stabilise at current levels," said ICICI Direct in a research report.
Despite in-house competition from 5paisa, IIFL Securities managed to break into the league of the top 10 brokers. In fiscal 2019 and 2020, IIFL was ranked either number 12 or 13 in terms of active clients; in the last two years, it has jumped to number nine. IIFL Securities is engaged in retail and institutional broking, distribution of financial products and investment banking.
“Discount brokers are a great way to get clients/ investors to start trading or investing. If they are savvy enough, they will continue to trade on their own. But if they are investment-oriented clients, they need a manager to sit with them and give them the needed support and respect. We have legacy clients that we cannot leave halfway," said Venkataraman.
For example, a large scrap dealer from Mumbai will not trust an app nor a nattily dressed wealth manager. “He needs a relationship manager who will give him the respect for the money he is bringing to the table and help in executing trades," said an official of IIFL. As of March, IIFL Securities has a total revenue of ₹1,150 crore and profit of ₹284.1 crore.
PIVOT: Angel One
Angel Broking, established as a traditional broker in 1996, however, has cut itself loose from the old ways. Its current avatar is as a new-age fintech platform called AngelOne.
For Dinesh Thakkar, promoter and chief managing director, the transformation from a full-service firm to a digital-only one was an emotional journey. It helped that the firm was not listed in 2017, when it decided to make the transition. Convincing shareholders of a move that could have led to a revenue drop of 65% per client would have been difficult. But the gamble worked. The firm listed in October 2020, with its profitability track record intact. At a share price of ₹1,344.75 it is today one of the most highly valued brokerage firms in India.
“We could not go to prospective investors during IPO (initial public offer) roadshows without showing profits. The pandemic helped us in becoming profitable early. The profitability we were hoping to achieve in 18 months (from a full transition), we achieved in six months," says Thakkar.
In 2017-2018, Angel found that new clients were landing up not at its 175 branches, but on its website. “More investors were coming in from Tier II and Tier III cities, from pin codes where we did not have any presence. They were 29-30 years old, comfortable with advisory through chatbots and wanted the prices to go down to levels offered by discount broking firms," says Thakkar. Angel read the writing on the wall, and in 2018-2019, it decided to focus on digital only. It closed down all offices across the country, retaining only sub-brokers and business associates. The firm now charges a flat fee per order.
At the end of March 2020, Angel had a net profit of ₹86 crore; it went up to ₹290 crore in fiscal 2021 and rose to ₹675.3 crore in the 2022 fiscal. This is an impressive 100% CAGR growth in profits.
The journey required Angel to reorient itself away from taking business-based decisions to technology-based decisions. “It was a tough call but we chose to appoint a technocrat, Narayan Gangadhar, as the CEO of the firm. We had to convince him of India’s potential and that Angel as a firm is willing and committed to make this paradigm shift," says Thakkar.
Gangadhar had previously worked at Uber and Volley Automation. Today, Angel has professionals from Walmart and MakeMyTrip heading key verticals. The top 25-30 posts are held by technocrats.
But the transition came at a cost—letting go of 2-5% of their legacy customers. “The firm was tasked with the monumental task of transitioning 12-13 lakh clients to digital only mode. Some were left behind," said Thakkar.
The future of broking
The new wave of digital millennials aside, there is still a large chunk of high networth individuals and legacy customers who are not comfortable dealing with impersonal digital interfaces. For example, a small business owner with a number of hotels in Mahabaleshwar (a hill station near Pune) and a small clothes store in Mumbai takes a bus to his broker’s office to understand his portfolio. That is the only way he will invest his money. Similarly, a diamond merchant in Zaveri Bazar needs his relationship manager to visit his office. “It is a matter of prestige, something to boast to his peers. That’s not all. This wealth manager also tells him about the best places to plan a destination wedding," said an official of large brokerage firm.
But how long will clients want a personal relationship? “For the next 10 years, the full-service broker model works, mostly due to these legacy, asset-heavy clients. But perhaps the next 25-30 years will be digital," says Thakkar.
The CEOs of top broker firms expect the middle ground to shrink—they will have to take a call between going completely digital and servicing millennials and attending to less digitally-savvy customers.
“Twenty years ago, there was value in helping execute trades. But this has changed today," said Venkatraman.
But here’s the thing: The extended bull run of the last two years drew hordes of retail investors. Today, when markets are volatile, making money might need something more. The number of new demat accounts opened in June, for example, dropped to a 13-month low at 1.79 million, the lowest since February 2021. This coincides with correction in equity markets and particularly small- and mid-cap stocks.
“During the last two years of a bull run, people have walked up to me and said, ‘Motiji you should buy this stock’. A rising tide lifts all boats. But now when the markets are correcting, the real value of advice comes into play," said Motilal Oswal.
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