After more than a decade-long run of steady, spectacular gains, India's recent stock-market turmoil comes as a rude awakening for the nation's new investor class. The Sensex's tumble of nearly one-third from last January's peak above 21,000 has also been a wake-up call for the feisty retail brokerage industry. But the markets' volatility is just a foreshadowing of more profound forces that will change the brokerage industry.

The days of easy growth when brokers could expand simply by opening a new streetcorner office equipped with a few trading terminals are drawing to an end. Our analysis of industry data forecasts that total trading volume on the National and Bombay Stock Exchanges will moderate over the next three years. With competition intensifying, one can expect brokers' commissions to decline sharply, crimping growth. Industry revenue, which nearly doubled over each of the past four years, will slow to a more sedate 20 percent annual rate to total some Rs 105 billion by 2010.

As the industry begins to mature and consolidate, brokerage firms that aim to prosper in the new environment will have to master three challenges:

Challenge #1: Find your customer sweet spot. As familiarity with the mechanics of investing has spread among the millions of households that have prospered in the booming economy, Indian investors have begun to coalesce into five distinct segments, each with its own tolerance for risk, investing style, wealth profile, and financial goals. Leading brokerage firms will hone in on the group they are best able to serve, offering a wider range of products and services tailored to meet those customers' expectations.

At the lower end of the wealth spectrum, so-called "mass affluent" investors have a wide range of needs—from financing a small business to building a retirement portfolio. Though their assets are relatively small, they expect face-toface financial advice and often turn to banks and insurance companies for low-cost services.

A second, more prosperous group takes a buy-and-hold approach. These investors are looking for a wide selection of products—from mutual funds and individual stocks and bonds to annuities and insurance policies—to meet broad asset allocation goals.

"Transactors," a third group, tend to be frequent traders, wanting brokerage services that link to bank accounts and more exotic financial products such as derivatives across a full range of asset classes.

With total household assets exceeding a half-million U.S. dollars, a fourth group, high networth individuals, occupies the pinnacle of the wealth pyramid. This elite group demands worldclass asset management, access to products like foreign currency trading and private equity funds.

A fifth group, geographically isolated investors, resides outside India's big cities. In terms of household wealth, the "remotes" span the spectrum from less affluent to quite prosperous. They tend to be less demanding than better-served urban investors, but they generate higher fees because brokerage firms have yet to penetrate deeply into the countryside.

Challenge #2: Concentrate on a core business. Appealing to customers indiscriminately by offering the same basic service to everyone, as the brokers were able to do during the long bull-market run, will no longer work. Now, the leaders will appeal to customers with a clear value proposition, backed up with distinctive products and capabilities that differentiate themselves from the competition. Brokers that crack this challenge stand to reap a big windfall. Because most investors have accounts with several brokerage houses, consolidating them with a single brokerage firm will be relatively easy.

Four business models look to offer the best prospects going forward. Discount brokers will invest in technology and build scale needed to deliver highvolume, low-cost trading for masses of do-it-yourself investors. For more sophisticated investors, firms will offer a full range of brokerage services, including margin accounts that allow these active trader clients to buy and sell a wide variety of options, commodities and currencies, in addition to stock, bonds and mutual funds. Brokers that develop their business model around a wealth-building approach will target affluent investors who seek expert advice for amassing a solid portfolio for the long term. Winning with this group will require them to provide comprehensive financial planning and building deep relationships with clients who will turn to them for a range of best-in-class financial products, including mutual funds and life insurance.

A fourth approach that we call the "instividual" business will cater to the most affluent individuals whose complex wealth management needs overlap with those of institutional investors. Companies aiming to compete in this lucrative space will need to provide top-quality investment and estate-planning expertise, a deep bench of research talent, and a full palette of financial products, including opportunities to participate in private equity, hedge fund and offshore investments. Indian firms that make the "instividual" business their core can expect to compete against major international investment firms and private banks.

Challenge #3: Build world-class operations. Today's market is a volatile mix of neophyte investors, inexperienced financial advisors, and laissez-faire regulators. As the industry moves beyond the freewheeling ways of the recent boom years, brokers will have to develop the capabilities needed to serve more discriminating investors. In this environment, only solid risk-management procedures will win investors' confidence. Ultimately, brokers will have to bring their customer service up to world-class standards in terms of transparency, reliable trade execution, seamless ties between brokerage accounts and the banking system, and zero-defect tax and performance tracking. Finally, brokerage firms will invest to develop first-rate organisations by recruiting and training employees in the relationship management skills that their clients deserve: This will determine their longterm success.

The message from the markets to India's brokerage firms could not be clearer. Brokers can no longer count on making money the old-fashioned way—by pocketing commissions earned just from buying and selling stocks. Now, to reprise an old advertising tag line used by a former U.S. brokerage firm, they will have to earn it.

David Mountain is a partner in the India office of Bain & Company and leads the Financial Services Practice. Vikas Saggi is a Senior Manager in the Financial Services Practice in the same office.