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May, 13 2010

Franchising Fills The Gap

Many independent owners in the brokerage industry had to bear the brunt of the economic recession resulting in declining of stock prices coupled with high intraday volatility. To weather the storm, many small brokers had to switch their businesses from in

Many independent owners in the brokerage industry had to bear the brunt of the economic recession resulting in declining of stock prices coupled with high intraday volatility. To weather the storm, many small brokers had to switch their businesses from independent to franchised ones. Here are some of the best business opportunities that will benefit the brokers.

INITIATING your own brokerage business or going in for a franchised option depends on the experience and financial capability of the entrepreneur who enters into the business of stock broking or real estate. In the brokerage industry, broker's educational qualification and professional experience counts whether he/she runs, owns or seals a franchise deal with the big brand to expand the business instantly.

Profile of a stock/realty broker

In the financial services sector, the minimum qualification required for becoming a broker is class XIIth or graduation with two to three years of experience in the stock broking business, either as a sub or main broker, or as an employee of a broker and a sub-broker. In case, you do not have the basic qualification, you must be a matriculate with a minimum of two years of experience in the capital market. Apart from this, the franchisees are also selected on the basis of their financial capabilities, how good he/she is in networking and understanding the local market.

In the brokerage industry, it is considered mandatory for every individual to get registered with the Securities and Exchange Board of India (SEBI), National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Elaborating on this point, Saurabh Shah, Head, Business Development, Sykes & Ray Equities (I) Ltd (SRE), says, “As per the SEBI guidelines, only members and their clients can trade on the stock exchanges. Thus, to start a stock broking business, it is mandatory to be either a member of the exchanges or be a sub-broker (franchisee) of a member broker.” In the stock broking industry, the franchisee reaches breakeven in six months to one year's time.  Sykes & Ray Equities (I) do not charge any franchise fee. However, the franchisee (sub-broker) would have to pay the SEBI a registration fee of about Rs 26,000.

Stock broking is a low-cost business opportunity. “In order to start a stock broking franchise a 100 per cent refundable deposit, of Rs 1-3 lakh is required. Other than the refundable deposit the franchisee must make available a 200 sqft. office furnished with basic office fixtures and an internet connection,” says Shah. As informed by Kotak Securities, a sub-broker of Kotak Securities would require an office space of approximately 300-500 sqft.’ preferably in a prime location of city/town.

As far as the realty brokerage sector is concerned, Ajay Rathore, CEO, Century 21 IPS, states, “As a matter of fact, in absence of any centralised regulatory body, initiating a brokerage business does not require any statutory formalities.” Talking of investment, Nipesh Parikh, Director, RE/MAX Empire, says, “The minimum investment for setting up a real estate business is Rs 17 to 40 lakh.”

Rathore says, “Investment depends on the size and scale of business undertaken. One can start individually from home or a small office with negligible investment as the majority does in brokerage industry. But a professional set-up like ours certainly calls for an investment in infrastructure and manpower, clubbed with professional expertise.” According to him, the break-even period depends totally on volumes and margins.

Independent or franchised business

In the brokerage industry, there is a plethora of small and big brokers, who serve the retail investors through their various products and services. Looking at the growth of stock brokerage in the Indian market, it is expected that this sector would enter into consolidation and expansion phase, where small brokers and sub-brokers would enter into strategic tie-ups with the big brokers to adapt to the demands of the industry. On its benefits, Shah feels, “A franchised business is an extension of the existing brand and experience. With a franchised business, an entrepreneur can immediately capitalise on the brand loyalty and experience the franchisor has earned over the years. With regards to the brokerage industry, the franchisee not only gets the brand and other advantages, it excuses them from the whole compliance routine, which is looked after by the main broker (franchisor).”

As far as independent business is concerned, the individual gets the advantage of working liberally without following any guidelines. The only drawback of a franchised business is to work within the strict guidelines as set by the franchisor. In a franchised business, the sub-broker or the franchisee receives complete training and marketing support from the franchisor for operating the business effectively. To cater to sub-brokers, Kotak Securities offers various training programmes to enhance the skills of the employees hired by the sub-broker to work more efficiently. On opting for a franchised business than an independent one, Rathore says, “Broadly speaking, the main advantage is that an independent business as a franchise instantly becomes a part of well-accepted and a successful business entity, providing a platform to operate at much higher levels of business success.”

While in an independent business, the broker has the liberty to run the business the way he/she wants. In the brokerage sector, many franchisors are eager to give license of their brand to independent owner/broker since they have the business acumen, knowledge as to how the industry works, regular client base, right location and infrastructure and they are familiar with the day-to-day operations of the office.

On the other hand, the advantage of taking up a franchise is that the franchisee is not required to pay attention on branding as the brand has already achieved recognition. Investors are well aware what they want and big brokerage firms are able to offer a bouquet of services under one roof. As compared to big firms, independent owners offer limited services to the investors and they are often doubted by investors as unsafe traders.

In a franchised business, the major drawbacks are that the branding can be diluted if extra care is not taken by the franchisee. The format, type and authenticity of the business can be modified/diluted if there are no strict checks and balances. Rathore says, “Disadvantages of going in for a franchised business are losing independent business identity, adhering to some branding norms imposed by the franchisor, lack of business confidentiality as most of the franchises are subject to audits by the franchisor, and more so the rights of the franchisor to pull back the franchise license in case of serious non-adherence of franchise contract.”

Presently, many big players in the franchising model operate through a network of sub-brokers/franchisees who provide right advice to the investors to put money in the right channel. As franchising is considered as a proven concept, the franchisee is able to break-even in a short time. While independent business happens to be more costly and risky since there is no proven success formula, extra funds would be required to find out the right location, infrastructure including computers and advanced technology, marketing and branding will become the owner's sole responsibility.

Products & services offered

SRE provides its clients with a platform to trade on the stock exchange both online as well as offline. Apart from stock brokerage, it offers mutual funds, insurance, IPO, government securities, DP service, etc. The company's separate division, Sykes & Ray Financial Planners provides comprehensive financial planning services to individuals.

RE/MAX Empire provides services for sale and purchase of land or residential property, services of sale, purchase or lease for commercial properties and corporate properties, negotiation for corporate customers, property management, study for market trends and analysing the same.

Day-to-day trading

In a stock broking business, the brokers have their own clients who trade regularly. Currently, SRE caters to close to one lakh clients across the country, a mix of long-term investors to daily speculators. Though it is difficult to estimate the number of customers doing day-to-day trading, to estimate regular traders, the company has observed about 30 to 35 per cent of its customers doing trading on a regular basis.

“At an average, our company serves more than 150 customers on a monthly basis, who have transacted with us. These are a mix of old and new customers. Out of this figure, an average of 30 per cent new customers are added every month. In a real estate business, the question of daily trading by one customer does not arise,” informs Rathore.

Competition & strategies

The Indian brokerage industry is facing many challenges such as client acquisition and subsequently delivering the highest quality of customer service. To overcome this challenge, the big brokers pay attention on instructing their sub-brokers/franchisees on client acquisition, managing relationships, advisory, technology and operations at the time of start of the business. It is assumed that in days to come, shortage of skilled talent and proper infrastructure and technology will be one of the major challenges for which the domestic brokerage houses will have to upgrade. Offering multiple products to the investor is also a challenge for the domestic trading houses.

It is anticipated that competition in the stock broking industry is all set to intensify as plenty of brokers such as India Infoline, Motilal Oswal, Reliance Money, Unicon Financial Intermediaries, Angel Broking, Karvy, Sharekhan, Enam Securities Ltd, Anand Rathi and Ventura Securities are planning to strengthen their hold in almost every tier of the country through their online and offline ventures such as through branch network and franchisees/sub-broker channel. The big brokers are going to give tough competition to unorganised players by offering quality service and multitude of products to investors to pick from. And to be on the safer side, independent owners are now operating under the umbrella of big brands through franchising. Stock brokerage is a high involvement business wherein broker or a sub-broker must aim to provide better services to the investors. Agreeing to this, Shah says, “The only differentiating factor between the competitors is the service factor. We have been constantly investing in improvising our service and customer satisfaction levels.”

Realty broking is extremely disjointed with the presence of property dealers and local realty brokers, who act as intermediary between the seller and buyers and assist the clients in selling, buying and leasing the property. International realty brokers such as RE/MAX, Century 21 India and LJ Hooker entered India two to three years ago and they are now scaling up their operations to increase their brand visibility. Looking at the realty pie, Rathore says, “Unlike in the past, the real estate marketing and consultancy businesses are attracting more professionals and structured business entities, widening the competition.” He further focuses on mainstream strategy of honouring its commitments made to the clients and maintaining total transparency in the business deals it conducts, which is unfortunately not very common. This brings confidence and trust in clients for sustained relationship, which is imperative for a steady growth.

Surviving the slowdown

It is said that small brokers were seriously affected by the rising inflationary pressures in the domestic economy, resulting in the steepest fall in the brokerage market in 2008. The market came under pressure due to the falling stock prices and dislocation of financial and capital market worsened the performance of the domestic brokerage firms. It is said that the companies with diversified businesses were less impacted by the slowdown. Shah comments, “During a slowdown, there are two risks poised to us, the obvious loss of revenue and attrition of clients (investors). We have maintained a policy to always safeguard the investor's money and restrict them from taking unreasonable risks. This has not only resulted in cementing our relationship with the investors but also reduced the loss of revenue.” Rathore clarifies, “We planted our roots in the most difficult times, during the slowdown. We believe in learning how to survive in crisis. In fact, the slowdown taught us aggressive business strategies to go forward. All this time, the company's major focus has been on the residential sector. But recently, we have launched our commercial property sales vertical as well.”

Fly high

It is expected that in the next few years small brokers may find it difficult to sustain their profitability in the market. To get instant recognition and success, small brokers will convert their business into a franchised one.

Observing the presence of independent and franchised businesses, the brokerage industry is expected to get over the gestation period and sustain their profitability. Small and big players are likely to consolidate their businesses and expand their reach to untapped regions by taking baby steps towards the franchising model, operating through a sub-broker channel to broaden their reach to the investors.

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