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WF: What have been the key regulatory changes that have impacted the stock broking business? How has the business model of an individual (small broker) changed as a consequence?
Motilal Oswal: With formation of SEBI as a regulator and the creation of National Stock Exchange, the markets moved from local exchange platforms to a unified market place across India. Arbitrage of information gave way to much more transparent and scalable technology driven trading which improved confidence amongst various participants within India as well as global investors who ushered in new pools of global capital. Domestically as well markets became accessible to even the remotest corners with same efficiency as is available in major metros making it a level playing field and making this attractive for new investors to come in. Confidence was further boosted with introduction of compulsory demat for all stocks in the year 1999-2000. This facilitated client settlement and eliminated fake/forged certificates. Also introduction of newer products like future and option segments helped clients to take position over two -three months without taking actual delivery.
All these together had a potent combination of bringing scale and reducing cost significantly.
WF: In what ways have you supported the transition of your channel partners through this period?
Motilal Oswal: We have been able to build a win-win partnership with our business partners and have created an all season business model. The main broker focuses on areas like research, product innovation, risk management, back office, legal/compliance, technology,brand etc., and local channel partner (Franchisee) to look after only client relationship management.
But this journey took time with several counselling sessions with sub brokers to make them think big and also realise the importance of focusing more on client facing activities and letting all other aspects be done by the main broker as he can leverage in investments in building specific expertise and economies of scale. This successfully helped them transition into thinking like relationship managers.
WF: When you look at your channel partners, what strikes you as the key traits that are common among those who managed this transition successfully and grew stronger through their period of turbulence?
Motilal Oswal: One common trait was people who were young with positive attitude and ready to adapt the new challenges. We were able to counsel them successfully as to how business should grow throughscale and technology. I still remember one of my top 3 channel partners left us because he was not willing to accept this change. He has re-joined us after 10 years in the wilderness and he is no longer in the top 50 also.
WF: What have been the more painful transitions that your successful channel partners have made and how did they go about this process?
Motilal Oswal: The most painful transition our channel partners had to make is letting go of non-value added activities like back office, operations and adopting the technology. We have fully centralised the same. So they had to change the way of doing business as they had to do more client facing activities. They initially felt a loss of power as payment to clients, payout of shares was happening centrally. They have managed to overcome the hump and now focus on relationship building and client acquisition. They have seen the results and now the ratio of client facing staff to back office is 4:1. They have also had to upgrade their skills into selling more products and get higher customer wallet share. We have a dedicated team which has constantly helped them go to the next level.
WF: If you look at the value proposition that a stock broker offers retail investors, can you please give us an overview of what the key proposition was, say 15 years ago and how it has changed today?
Motilal Oswal: Say 15 years back, the focus was more on research, advice, brand, and relationship management. While these aspects still remain relevant; it has been enriched through higher focus on technology to improve convenience for customers, deliver customized advice and also give them a 360 degree view of clients. Also firms are now working on entire wallet share which helps them provide various asset based product to meet clients' needs for wealth creation.
WF: In the equity business, how feasible is it to carve out advice from execution and ask investors to pay for both separately? Are we seeing any trends in growth of independent fee based equity research? Will research continue to be paid for from transaction volumes? How do you see the evolution of fee-based advice in our market?
Motilal Oswal: Currently, it is very difficult to carve out advice from execution. We are not seeing any trend in growth of independent fee based equity research however we are see aclear cut demarcation between execution and full service brokers. We see research continue to be paid however some brokerages may take an advisory license and package customer advice/research for subscription fee.
WF: With your rich experience in helping your partners manage this transition, and given the context of the transition we are seeing in fund distribution, what will your advice be to IFAs - many of whom believe that they may become victims of change?
Motilal Oswal: I see three changes happening - one on the technology front wherein MF/insurance are getting more popular on online platforms. The second change, I see, happening is demarcation of execution from advice for mutual funds. The third, I see, is RMs (IFAs) focussing on few large relationships instead of managing too many customers. These three changes together will bring out remarkable change in the way financial intermediation will function in the years to come.My advice to IFAs would be to whole heartedly accept this change and focus on their strength that is relationship management and client advisory. They should sell the right products to clients and should move beyond MF distribution and sell other products like equities, bonds, NCDs, PE funds, PMS etc. I also see consolidation happening in the intermediation industry. IFAs should either build their own brand or align themselves with a national brand.
WF: Some observers believe that just as the NSE was created to check the "monopolistic tendencies" of BSE brokers, SEBI is promoting direct plans and now e-commerce platforms to place a check on the influence of distributors on the MF business. Is this a fair comment?
Motilal Oswal: Only short term focussed people may take this view. When the size of the market is becoming large, naturally the commission rates fall as I have seen in equity broking, the only difference is here the push is by the regulator since the markets are still at the nascent stage. In my view, SEBI's focus is to increase the market penetration at large and faster scale. Once these concepts of financial instruments on ecommerce platforms become popular, I believe people would need personalized guidance for investing in these instruments. The role of financial advisor has only increased. I see availability of these products on ecommerce platforms as a great idea which will benefit all of us. Competition which helps incumbents become better is always welcome.
WF: When you look back at how the stock broking business was once perceived, the regulatory changes that came as a result and where the business stands today, what advice will you give to fund distributors on what they should and should not do, in order to enhance the perception of their business in the eyes of all stakeholders?
Motilal Oswal: Mutual fund distribution business has not changed dramatically over the past 50 years and hence there is a lot of trepidation in the minds of the distributors. We had this same fear in the late 90's and early 2000 when changes were happening in rapid succession. We looked at all these changes as an opportunity rather than a threat and expanded aggressively to capture market share. We also encouraged our channel partners to do the same. I foresee a big opportunity amongst the better distributors to cannibalise the business of smaller and non-serious distributors if they focus on selling more products, customer centricity, relationship management and technology. I also see opportunity of huge numbers of new customers coming in the market due to popularization of financial products through ecommerce platforms and robo advisory. The biggest challenge I see in the distributors is mind-set, skill upgradation, acceptance of new technology and lack of second line in business.
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