Discount Brokers: Why are they all over the news?
Look up the term “discount broker” in Google, and you’ll find an interesting mix of results.
On one hand, you’ll find articles being written about the current wave of “discount brokers” in India who are disrupting the industry through lower operational costs, huge cost savings for the end user, and more importance being placed on technology and the overall user experience.
However, on the other hand, the distinction becomes a lot more murky when one considers the following: a discount broker can charge brokerage, offer advisory services, and still be operationally lean enough to be labeled as a “discount broker” due to its low pricing schemes.
Take, for example, discount brokers in the United States. I frequently get asked the question “how do discount brokers operate in the US?” The answer, frankly speaking, is that virtually all household brokers are “discount” brokers. That being said, most offer additional services- such as advisory/research (note: not tips, where they tell you exactly what to buy and sell, contrary to most full service brokers in India), different technology offerings that differ on price, educational offerings that are sometimes free of cost, and other value adds the customer can opt for.
In other words, outside of the fact that none of them have the massive number of brick and mortar branches like India does, “discount” brokers in the US are virtually the same as “full service” brokers in India. (one notable exception is that commissions are almost always paid on a per trade basis, while full service brokers in India charge brokerage as a percentage of turnover).
With that quandary firmly in place, it comes to a surprise that discount brokers are all over the news. More specifically, it’s ironic and a bit perplexing as to why a brokerage house must either be labeled as a full service broker or a discount broker.
Take, for example, a value added service such as a brokerage calculator. Virtually no broker offers a transparent brokerage calculator like the way RKSV does. Doesn’t that break the rule of a discount broker, since it is providing a value added service? Why must a broker provide arbitrary “tips” from a in house research team in order to be classified as a full service broker?
It’s interesting that recently, an association of brokers lobbied against SEBI that a “minimum” brokerage must be applied on all trades to ensure full transparency. My immediate question was not the obvious (which is, how does applying a minimum brokerage help the retail investor in any sort of fashion), but a more simplistic one: why must a discount broker be associated with a pricing model that does not charge brokerage? It very well could be that tomorrow, RKSV charges 0.5 paisa brokerage on all its trades (we have no intention of doing that!). In fact, with such a brokerage structure, RKSV could potentially be undercutting itself and other “discount” brokers that charge a flat fee per trade.
A New Way Forward: Thinking Outside the Box
It’s no doubt that discount brokers are here to stay. The logical, rational way forward is for all parties to understand that classifying brokers into different groups only confuses the industry and users. A user should not have to choose between two “types” of brokers. Because who knows, tomorrow a broker might develop a business model that provides value-add advisory services, has branches across the country without passing the overhead costs to the end user, provides unbeatable pricing, and even has relationship managers that guide (but do not give tips) to users to help and assist them in times of need.
At that point, the media will have a tough time placing the brokerage house into one of the two boxes.