Commoditisation of broking business has been good for investors

It is probably among the select few which have successfully positioned themselves as an integrated financial advisory company. Having seen most of the ups and downs that the Indian financial services sector has gone through, Parag Parikh, Founder of Parag Parikh Financial Advisory Services shares with us his insights on the present state of the broking industry.

What is your take on the present state of the broking industry?

Once upon a time broking was handled by a very closed club. It has witnessed a change with the setting up of the National Stock Exchange followed by the launch of internet trading and with the liberalisation that has happened particularly in the financial sector. The broking business has become somewhat commoditised. Previously, it was considered as a speciality but it has become a commodity now. So, I think that it is a natural phenomenon that many players will enter the space.

Is this commoditisation of the broking business good or bad for the investors?

The process has been good for the investors, as a lot of transparency has come in and the SEBI has played its role in a proper way.

After a dream run between 2003 and 2007, a lot has suddenly changed. Broking houses have been badly affected, with volumes on the lower side. What do you think is happening?

The market always goes through these phases. You will witness a bull phase as well as a bear phase with the expansion and contraction of the economy. The financial markets get a lot of attention as they are the most talked about markets in India. This happens with all markets and it will pass.

What exactly is hurting the industry at this point of time?

Well, I have a different perspective on this. If you say that competition is hurting me, then you are on the wrong track. There is competition in each business. These are the normal hiccups that each and every industry faces.

Many leading brokers have shifted away from their core broking business. Please throw some light on this.

There are two views on this. First, we are in a knowledge economy, and how many brokers do you think have really thought of giving the right advice to their clients? Broking or money management is basically a profession. As a professional you will do whatever is right for the client. However, this profession has turned into a business over the last 10 to 15 years. The setting in of the mentality of trying to make money by hook or by crook is where the whole professionalism of the market has gone away.  

How has the mindless expansion by broking companies hurt the industry?

Mindless expansion can only take place when one has no knowledge and factors in that everything is permanent. You have to be mature enough to understand that every market will have its ups and downs. If you are doing it in anticipation of super profits, then one also has to keep in mind that super profits come and go at a great pace. Expectations of super profits is what has led to expansion, but there are exceptions too.

The broking industry has become overcrowded, and it has turned into a ‘business’ from being a ‘profession’. Every Tom, Dick and Harry has come into the market and is looking forward for his share of the pie. Investors too are looking for cheaper rates, instead of going with experienced brokers. This is playing a role in diminishing the quality of services offered.

What is your take on the price war that has triggered lower and lower brokerages being offered to investors?

I must say here that investors are very greedy. Let me take it this way—if you are ill, then will you go to the cheapest doctor? The answer is ‘No’. Then, why do you go to someone for managing your money only because they offer cheaper rates. The correct breed of investors will always choose the right path instead of looking for cheap rates. They are even not bothered about the brokerage, as they are not traders. In our organization we do not have F&O, and stay away from speculation. Therefore, my clients know that if they are paying me more, it is for the advisory. In other words, I can describe our company as an advisory that is also into broking.

Is there a need to cap the minimum brokerage?

No, once we start talking about the competition then we cannot have a minimum cap on brokerage. However, we can have a cap on the upper side, otherwise we will go back to the days  of ‘Licence Raj’.

Do you feel that there will be some consolidation in the broking industry?

Yes, there will be a consolidation process that will take place due to over-broking. This is part of the evolution.

Lot of institutions are now getting into the broking business. Please share your views on this.

Institutions are getting into the broking business mainly because broking is a very cheap business to get into, and it is very systematic. Today, everybody wants to get into all sorts of businesses, but if money-making is so easy then why isn’t everybody making money?

What can investors expect from the broking industry going forward?

One thing that investors need to understand is that there is no shortcut for making money. Long-term investment is the only mantra for earning good returns.