There is a stupendous amount of noise about discount brokerages taking over the business from the incumbents. Way too much noise ! So much so that you can easily miss the forest for the trees.
If the new age brokerages (here on referred to as Zero) are rivers, the old school wealth management businesses are the ocean.
While the focus amongst the top 10 chaps is excessively on the marketshare of new accounts opened, the actual focus needs to be on how many are getting closed ! The tail end of the brokers are folding shop at a massive pace or are looking for an exit. All this business is just moving lock stock and barrel to the top 10.
All the attention seems to be on the Gen Z and Millennials who are basically the 20-40 year olds. The funny part though, is that the actual money is with the Gen X and the >55 years and these guys are not going to Zero, but have their money with the ICICIs and the Kotaks of India, simply because they are used to talking to people and not to some unknown person on the other end of the telephone.
When you do something for the first time, there is a tremendous amount of excitement about it and therefore the noise. Zero is something that has hugely benefited from the 1st timers noise. Let us just say it is like prom night. As you keep doing it the excitement reduces and so does the noise. If every man married for 20 years was to have the same excitement that he did when he lost his virginity the world would be a massively different place.
Just the same way, people with money who have had money, have money and are most likely to keep making money usually do not make a lot of noise. More often than not, they would not even like to tell you with whom they bank with or trade with.
Excitement and secrecy seem to be inversely related to the amount of money one has.
Lots of first timers move into Zero and sometimes as they get wealthy, they park a part of their money in other assets. More often than not, this parked money is not going to COIN, but to places which are old school – HDFC, ICICI, Kotak, Axis etc.
ICICI manages private wealth of 1.7 lakh crores !!! 1.7 lakh crores. Let that number sink in. I personally, in my not at all humble opinion think it can grow 3x in the next 10 years.
ICICI is able to milk this 1.7 lakh crores at a 0.4% yield, either by transaction fees, brokerage, advisory or whatever – It has an influence over this money and I think it has the ability to make money for its clients and itself !
On one side of the brain think about this number that is consistently compounding at a minimum 20% CAGR (minimum) and think about all the new financial products that are coming into the system. Very soon “Fixed Deposit” will become a bad word.
- Pure Equity
- Mutual Funds
- Venture Capital
- PE funds
- Pre-IPO funds
- Secured Debt
- Unsecured debt
- Gold Bonds
- Global Investing and so on.
Out of the 1.58 active NSE clients that ICICI Sec has, 1.02 mn clients have at least 2 products with ICICI, and all of these guys are under 40. Do not underestimate the ability to cross sell. Personally I think a relationship with a comprehensive financial service parter like iSEC is pretty much like a marriage. When everything is good, even if not the best, is is very unlikely that one would look outwards. Only if there is a massive Khurrak that can be fulfilled by some exotic product that iSec does not approve would one need to subscribe to something else, i.e have an affair 😉
Biggies like Schwab who started out as discount brokerages, now are all full stack. They have an integrated account – a place to make money, store money and have money managed. They long ago realised that it is great to have one account for everything. Integrated accounts have massive advantages.
Cross-selling potential is absolutely huge with integrated accounts. You have active investments and passive investments. When one wins your trust for active investments, getting you to take on passive investments is hardly a task.
There are basically 3 types of customers for Wealth Management
- The Delegators
- The Validators – ones who will delegate, but will check up on the facts that are being represented.
- The Self Directed Investors – the smallest ones of the lot.
The delegators are quite happy just buying into a Mutual Fund – ICICI’s strong point. The Validators take advice, re-check and then buy. Given that Zero does not give advise, the ball is again in ICICI’s court. The Self Directed Investors – most of whom don’t know that they are actually gamblers find Zero to be heaven. I’d love to see what % of the so called Zero investors continue to “invest” over a 10 year period. I can bet that the number will be abysmally small.
Some pointers about India
- The Middle class is joining the money class.
- The Money class is finding enough opportunities in India and is increasingly not hiding it away in the Swiss accounts. The money class is also increasingly moving towards white money from the erstwhile black money.
- India is moving away from a nation of savers to a nation of investors 😉
- The future of money is moving into advisory and assurance. Dumb FD money is moving into balanced equity funds. Smarter money is moving from Mutual funds into AIF, PMS, Venture Funds and PE funds.
- Balance of power in the mutual fund industry is moving from the manufacturer to the distributor.
- Brokerage revenues are cyclical. Wealth Management is not cyclical. Not all rivers are perennial, but all oceans perennially have water in them.
- Real estate in most cities is at peak valuation. People are preferring to invest into financial assets rather than a second home.
There is no free lunch, ever. If you aren’t paying for something, you are paying for it thru data. Zero has been built on the philosophy that full service brokers are the bad guys and Zero is the Robin Hood in shining armour giving away everything for free to the poor first time investor. There are no classes, no premium clients, no special treatment etc according to Zero and that makes a newbie feel good. A lot of this is true, but what is also true is that.
- Zero advises you on nothing. Almost all advisory or so called advisory is not based out of Zero but things like Small Case or Coin or Sentinel – which are not really by Zero.
- They have 0 advisory and 0 research that they share. With the kind of data that they have given the might of transactions, they could easily be the best hedge fund in India. However, they don’t share insights and only give you cheaper transaction plans.
- You can’t ever put a face to anyone. A call centre is a cold cold place and it is a terrible experience when you call in distress.
Basically Zero gives you the cheapest tools to churn yourself into bankruptcy 😉
My point is that there are limitations to pure technological efficiency. Investing is both an art and science but Zero is focusing a little too much on the science part of it. Science is democratic, and art can be a little aristocratic , but art will always take time to scale.
ICICI has put art to scale, slowly and I would say super well. On the science part, it is more reactive than innovative, but it won’t leave you wanting for much. Given that it is easier to scale efficiency than trust, the old schoolers score leaps and bounds over Zeros and that is the main business I am excited about.
There is a tonne of money to be made in management. Way more than in transactions. Also, the management moneys are chunky and much larger than transactional money. As long as a broker has skin in the game, either reputation or a profit share and has his heart in the right place, this money will never stop. I think the wealth management piece of the business has not got its due yet.
Godrej Properties did so well because of two main reasons, or rather one reason, with two facets. TRUST. The buyers trust that GP will not mess around with their deposits (despite RERA) and landlords believe that GP has the ability to sell, not only because of its execution prowess but simply because it has a massive client based that is only increasing.
ICICI too is in a similar position, on one hand it has a massive retail and HNI client base and on the other it has a super credible advisory service. They made a 160 cr in issuer and advisory services recently. Given that a tonne of start-ups will be listing this year and that ICICI has been around for a bit, this revenue is set to grow massively.
I’ve typed out this rant not so much because I wanted to share the awesome business that ICICI Sec is but more so for the reason that the market seems to think that the one with the highest new accounts opened is the best. I hope this rant clarifies that this assumption is far from true and that it is important to understand that both the Zeros of the world as well as the ICICI’s of the world are going to make tremendous money in the future, not just because they are super well run them selves, but because about 30-40% of the tail end brokerage companies will soon shut in India.
I would dare to say, if you believe in the stock market and the unstoppable financialization of India, ICICI Sec is probably as good an investment as one into the National Stock Exchange.
Disclosure-My family office is invested in ICICI Sec for a while now.
Clarification – By Zero I do not specifically mean Zerodha, but refer to discount brokerages like Zerodha, Upstox, 5 Paisa etc which are the new age tech leaning brokerage platforms.