Brokers dominate client consent requests in account aggregator system to verify income, open F&O accounts

Half of the client consent confirmations obtained by financial information users regulated by the Securities and Exchange Board of India were used to verify income and determine their eligibility to open futures and options accounts, underscoring the need to provide more holistic financial advisory services in India, a report showed.

About 48% of the consents received as of March 31 were used for personal finance management and 2% for portfolio review and management, the DigiSahamati Foundation Sahamati said in its ‘Report on Personal Finance Management facilitated by Account Aggregators.’

Sahamati is a member-driven not-for-profit private limited company that aims to promote and strengthen the Account Aggregator ecosystem in India. It seeks to help give users better control over their data and gain access to innovative services and products easily.

While Account Aggregators (AAs) are designed to facilitate consent-based data sharing to empower consumers with control over their financial information, the report showed that brokers have leveraged the system primarily to determine client eligibility for F&O trading rather than to provide personalised financial advisory services.

Understanding the AA ecosystem

The AA framework simplifies the sharing of financial data between institutions such as banks, insurance companies and mutual fund houses with the consumer’s consent. 

Among the main participants in the framework are financial information users (FIUs), which use your data to provide products or services. As of 31 March, 84 Sebi-regulated entities across portfolio managers, stockbrokers, registered investment advisors and research analysts participated in the AA ecosystem as FIUs.

The other participants are financial information providers (FIPs), which are entities that hold your financial data, and AAs, which are consent managers that securely deliver your data to FIUs with your consent.

The system has revolutionised the process of validating client income by allowing consumers to give OTP-based consent, enabling AAs to directly fetch financial details from banks and demat accounts. Previously, providing income proof involved submitting scanned copies of bank statements or income tax returns to brokers. 

Democratising advisory services

The promise of AAs lies in their ability to democratise personalised, data-driven advisory services. With India’s low advisor-to-population ratio, there’s a critical need to expand access to financial advisory services. In the US, the UK and Australia, a higher advisor-to-population ratio means more people have access to personalised financial advice.

However, the current status of discretionary financial products in India shows that these services are primarily available to high-net-worth individuals and ultra-high net worth individuals.

The broader retail investor base faces barriers due to cost and awareness issues, relying on intermediaries for product recommendations. AAs have the potential to transform this model by empowering entities with the capability and trust to offer scalable and efficient advisory services.

RIAs vs. brokers: Who benefits?

Sahamati’s survey of top Sebi FIUs in the AA ecosystem, especially registered investment advisors (RIAs), reveals that while RIAs accounted for a significant portion of consents, brokers outpaced them in leveraging AAs for F&O income verification.

The data collected from four RIAs that represent about 60% of the total consents taken by RIAs in FY23 and FY24, shows that RIAs have maintained steady growth in consents. However, the consents sought by brokers in using AAs for F&O eligibility verification has grown rapidly.

By March 2024, it’s estimated that more than 6.5 million customers used AAs for PFM, with RIAs playing a significant role. However, the dominant use-case remains F&O income verification, underscoring the need to shift towards more holistic financial advisory services.

Conclusion: Bridging the gap

The AA ecosystem holds immense potential to transform wealth management in India. While the current usage trends highlight a preference for income verification over personalised advisory services, there’s a clear opportunity for RIAs to leverage AAs to democratise financial advice.