Back in the late 1980s when I entered the stock market, there was no chance of getting personal attention from brokers who dealt only with high networth individuals. Even one of my schoolmates who turned a sub-broker told me that he wouldn’t refuse my custom out of friendship but hinted that his typical customer was someone with a portfolio of at least 10 lakh rupees (which was equivalent to around 50K USD at the time).
So, when online brokerages like ICICIdirect opened up in mid-1990s with the onset of Internet, that was a boon for people like me with smaller portfolios because they didn’t stipulate any minimum portfolio size.
Having enjoyed some of the advantages of an online brokerage (e.g. total pricing transparency), I’ve stayed with one of them to this day.
Against the backdrop of my personal experience and in the light of the fabled growth of FII-fueled stock trading volumes in the Indian bourses since the late eighties, it would appear that personalized service would be an even rarer commodity now and that new entrants today would have to content themselves with self-service through online brokerages. Turns out that that’s not at all the case.
Apparently, online brokerage companies are employing a lot of people at very low fixed salaries to sign up new customers. These people are expected to supplement their income through incentives that they earn when their customers trade greater volumes and cough up more brokerage fees to the online brokerages. This has created self-styled relationship managers out of these salespersons who offer personalized service even to new market entrants with tiny portfolios.
With uncertain job prospects in India amid the current depressed economic conditions, it’s easy to understand how this model works since it provides these salespersons an opportunity to earn a decent living, albeit only by stretching themselves to do a relationship manager’s job in addition to their sales job.
However, with the inevitable upturn in the economy, this model is unlikely to be sustainable since fixed salaries are bound to go up and it wouldn’t be necessary for these salespersons to provide personalized service as the only way to earn a living wage.
When that happens, online brokerages face the risk of estrangement from a large swathe of their customers who suddenly would have to fend for themselves. To hold on to such customers acquired during the downturn and pampered by personalized service, online brokerages might want to consider deploying Rich Internet Applications. With their ability to create rich and responsive web applications, RIAs deliver great user experience and could prove to be a close substitute to humans providing high touch personalized service.
UPDATE DATED 18 DECEMBER 2020:
It’s 12 years since I wrote the above original post.
The stock trading companies making waves now are zero-fee online brokerages like Robinhood (USA) and Zerodha (India). They fund their fee-free business model from the money they earn by selling their order flows to trading firms. In doing so, they commit to their customers that their execution quality – jargon for trade price – matches or beats that of their competitors.
SEC has challenged this claim in the case of Robinhood.
According to Finextra article entitled SEC fines Robinhood $65m over trade dealings, “Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices.”
In short, Robinhood is accused of obfuscating the trade price.
Well, this is exactly what happened with human brokers in the late 1980s, and I assumed wouldn’t happen with online brokerages, who, I thought, would provide “total pricing transparency”, to borrow the expression I’d used in my original post. How naive I was!
As for the puny $65 million fine paid by Robinhood, it reminds me of another anecdote from the late 1990s. ADM was fined by US government for price fixing lysine, a food additive. As most fines go, it was puny in comparison to the company’s size. Fortune magazine closed its article on the investigation with the following line:
“Not only does crime pay, it’s just the cost of doing business.”
How some things never change!