The survival strategy

Down and out for quite sometime now, the Indian equity broker community is again trying to hit the deck as bulls are in command for the last couple of weeks. But with investors being highly risk averse, the question remains, how will these brokers manage to find the mass that they need to survive? mona mehta tries to find out...

Unlike the period between 2004 and 2007, when the country's stock market was witnessing a massive boom and, any and everyone was more than ready to put every single penny of their savings in the stock market; investors are more defensive and risk averse now. Going by the trend witnessed over the past couple of years, investors seem more interested in instruments like insurance and fixed deposits than mutual funds, let alone equity investment. That certainly has threatened the bread and butter of many of the equity broking firms which mushroomed during the boom period. Survival is their basic problem now. Though the recent bullish market has created some hope, participation of huge number of investors is still a distant dream. Questions remain: What is the way out? What are the strategic moves that can help these firms stay afloat?

Answers, B Gopkumar, Head of Broking, Kotak Securities, “Broking is a cyclical business and the challenges in a bear market are many, the biggest one being to ensure that clients do not erode value of their portfolio." In order to live up to the task, his firm is now running programs to sharpen skills of their research team, dealers and the advisory board to steer the customer smoothly through a bearish market. He reveals, “In order to overcome challenges, we are focused on improving our research advisory and technology so it becomes easier for people to interact with us". This certainly is an essential requirement to boost confidence of existing customers as they are very selective and expect a good return on every penny invested.

In the meantime, some broking firms have moved on to a different level. They are busy conducting investor-education programs all over the country to educate investors on how to trade in volatile markets. The long term vision of course is to keep investors associated with the firm throughout the bad phase.

However, the most prominent approach followed by broking firms at this point of time is diversification of product offerings. Broking firms, which were dealing with only stocks once, are now trying their hands with a number of other investment instruments ranging from currencies to commodities to bullions and real estate.

More or less all firms who were dealing with "equity only", are now forced to offer multiple products from their stable. Take CARE Ratings for example. As informed by DR Dogra, Managing Director and Chief Executive Officer, CARE Ratings, informs, “The firm is now following the policy of diversifying our product mix to counter swings in the business cycle. In today’s environment where investment is low and debt markets are static, we have been developing and expanding our reach in other segments such as small and medium enterprises (SME) rating as well as various grading products such as those in real estate, education, equity markets and so on.” Pick up any broking firm and the approach is more or less the same currently.

But what about those, who decide not to diversify and continue in their domain of expertise – stocks? Well, experts believe that they would have to relate more to their clients and properly guide them through these times and enable them to take informed decisions. They have to get closer to the customer so as to build trust and have to work that much harder. Most importantly, if the broking firm is advising, they must ensure that the advice is perfect and will deliver results up front. They have to necessarily show the right direction in these challenging times. If they fail, investors will show them the door in no time.

According to Gopkumar, the real marketing challenge for broking firms at this point of time is to identify opportunities with limited downside but larger upside to the customers when the cycle turns. He comments, "In a bearish market, volumes tend to dip. Like cash volumes have dropped more than 40 per cent over the past year (till September), mutual funds are witnessing net sales, and the market was going nowhere for months. In such a situation, customers lose interest and focus on debt instruments." Thus, the "equity only" broking houses have to be on their toes just to survive.

Nevertheless, the best strategy to survive the situation is to diversify, especially into the bullion and foreign exchange trading, the biggest challengers of equity market at present. Says Kumar Ramchandran, CEO, Capital Markets Group, Concept Communication, “The biggest challenge in the marketing of financial products has been the way gold and silver have out performed in the last 24 months. They have left all other financial products behind." Similarly, owing to economic turmoil major global currencies are on slippery grounds witnessing great degree of movements, creating huge opportunities for investors and, of course, the brokers.

Many believe that product innovation can be another solution for brokers at this point of time. But is it really so? When investors are already risk averse and market conditions and outlook are uncertain, would they even want to experiment with some new product? Sounds tough. Keeping that in mind, perhaps the best possible strategy for the brokers at present is to sharpen their skills in their core domain and diversify to other areas, where they can promise assured returns to the investors to keep them interested.

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