One of the key requirements as per the agreement is the initial payment of a deposit by the sub-broker to the stockbroking company with whom they partner.
This security deposit gives the sub-broker a right to do business in the name of the stockbroker. Further, as per the agreement, certain rules and policies of ethical conduct also need to be followed by the sub-broking partner.
Typically, the initial deposit is a one-time investment and can range between ₹50,000 to ₹3,00,000. It can be a bit less or more than the defined range but the majority of stockbrokers require an amount within this range.
Initial Deposit – Key characteristics
Here are a few important characteristics laid out for you in regards to the initial deposit amount and related formalities:
The initial margins can be accepted in the form of cash or shares as well.
Almost all broker firms provide the service of refundable deposit to be given back after the end of the term as specified in the contract.
The deposit amount is used as a security in case of non-payment by the sub-broker.
In some cases, the amount of the initial deposit also determines the revenue sharing percentage one would be entitled to.
The sub-broker or a partner can also open a Demat account or a trading account with the broker firm for facilitating official transactions.
Sub Broker Business Model
So far this has been a popular model for the sub-broker business but is there a way to do the same business without having to pay this deposit?
To understand this, we need to first look at the various sub broking models prevalent today.
In this scenario, a broker firm provides a franchisee for a particular area or city under the firm’s name. An initial deposit as a franchise fee is required for a start. They own a physical location as well.
Authorized Person (AP)
A kind of a franchise where the said person is appointed as a franchise but also by a trading member of the exchange. Similar to the previous model the initial deposit is required to do business under the broker firm’s name.
An agent of the stockbroker firm acting as a representative and working on a commission basis, although the share of the revenue will be smaller. A small deposit is required in this case.
An agent of the stockbroking house who only gives a reference of the clients to the firm and vice-versa.
Once the client has been converted by the firm the introducer gets a commission per client either as a fixed fee or a percentage of the cost of a transaction.
In this case, usually, no deposit amount is required.
Initial Deposit Models Examples
Many firms these days use multiple of the above-mentioned models and accordingly charge or do not charge an initial deposit.
For example, Fairwealth securities which have separate rules of initial deposit for different business models i.e. for a master franchise, a deposit of ₹2,00,000 to ₹4,00,000 is required.
Similarly, between ₹50,000 to 1,00,000 for an AP and ₹10,000 for a remisier. No deposit is required for an Introducer or a referral program.
Another example would beTradeeasywhich provides similar multiple model services.
Then there are mainstream serious full-service stockbrokers such asAngel Broking,IIFL orICICI Direct that require an initial deposit of at least ₹50,000.
Sub brokership Without Deposit – Possible?
The broker firms, today, are competing for providing lower costs on the initial investment to sub-brokers. What better way to beat the competition than a sub-broker without a deposit offer.
The first step in this is to remove the requirement of the initial deposit altogether.
However, other factors are also considered for the deposit amount such as the size and the client base of the sub-broker or the minimum trade requirement if any, placed on the sub-broker.
Hence, a sub-broker with a good reputation and a large client base, who can guarantee a certain amount of minimum trade, might have their initial deposit requirement waived off.
Having said that, if you are someone who is serious about setting up a partnership with a reliable brand in the industry, this initial refundable deposit should not come out as a deal-breaker.
There are high chances that brokers with limited presence and brand equity will try to partner with you at no cost, but is that a great deal for you in the long term?
Food for thought!
Sub brokership Without Deposit Examples
Until now the zero-deposit model was only reserved for referral programs or the Introducer, but it is now increasingly being put into action for other models as well. Let’s look at a few more real-world examples of this model at use:
Cashbox is one such firm in India that has a free sub brokership plan. In short, they provide the service of zero initial deposit facility to partner with them. They have been heavily promoting the idea of mutually beneficial low-cost sub-brokership with an 80:20 level of profit sharing.
However, it is a new brand in the market and still needs to work towards its branding and image.
Edelweiss provides a zero deposit sub broker model on its model of business known as Edelweiss Elliance, which is a similar model to the remisier.