PMS firms can’t charge any upfront fee to clients; Direct option introduced in PMS too

Only trail income for distributors, brokerage fee at actuals to be charged to clients as expense. New exit load norms too

Kumar Shankar Roy Feb 14, 2020

Portfolio management serviceIn a new set of norms for Portfolio Management Service (PMS) industry, markets regulator SEBI has directed PMS providers to not charge any upfront fee to clients, a move that will compel portfolio managers to tweak their customer acquisition strategy that so far relied on sourcing large amount of business by paying distributors beforehand.

Also, SEBI has asked portfolio managers to provide an option to PMS clients to be on-boarded directly, without intermediation of persons engaged in distribution services. This is akin to direct plan options provided by mutual funds. Read on to know more about the norms that come into effect from May 1, 2020.

Also read: SEBI raises PMS investment limit to Rs 50 lakh; doesn’t it make expert-managed portfolio inaccessible while direct stock exposure free for all?

No upfront fees, trail model

In a circular released late evening on Thursday, the SEBI said: “No upfront fees shall be charged by the Portfolio Managers, either directly or indirectly, to the clients.”

Upfront commission paid to distributors for bringing investor to PMS outfit but the money is paid for by the investor through the upfront fee arrangement. Some of the prominent PMS outfits are known to charge upto 2.5% upfront fees to PMS customers.

The scrapping on upfront commissions in PMS means that any fees or commission to distributors will only be on trail-basis. Further, any fee or commission paid has to be only from the fees received by Portfolio Managers, a move that could see PMS shops rejig performance fees to bank-roll trail commissions and expenses for distributors.

The scrapping of upfront fees in PMS is in line with reforms carried out in mutual funds. In September 2018, SEBI had scrapped upfront commission to MF distributors and instructed fund-houses to adopt the full trail model of commission in all schemes.

Curiously, PMS providers have been directed to ensure that prospective clients are informed about the fees or commission to be earned by the distributors for on-boarding them to specific investment approaches. This requirement may face some resistance from distributors who are uncomfortable about disclosing their financial incentives to customers.

Direct option

At present, most PMS outfits get clients from distributors. But, now they will have to facilitate direct on-boarding as well.

“Portfolio Managers shall provide an option to clients to be on-boarded directly, without intermediation of persons engaged in distribution services. Portfolio Managers shall prominently disclose in its Disclosure Documents, marketing material and on its website, about the option for direct on-boarding. At the time of on-boarding of clients directly, no charges except statutory charges shall be levied,” the SEBI circular said.

The introduction of direct option in PMS appears to be in sync with the separate direct plans of mutual funds, which were launched in 2013. Direct on-boarding means lower customer acquisition costs as well zero trail commission expenses for the investment manager, leading to benefits which must be passed on to the ultimate customer.

Capping costs

The SEBI has also directed PMS players to rationalise brokerage costs charged to investors. “Brokerage at actuals shall be charged to clients as expense,” the circular said.

Some PMS outfits have been known to charge over and above the actual brokerage charges to clients.

The SEBI has virtually closed the route for PMS outfits to add unnecessary costs. The regulator said: “Operating expenses excluding brokerage, over and above the fees charged for Portfolio Management Service, shall not exceed 0.50% per annum of the client’s average daily Assets under Management (AUM).” This will control the tendency of some PMS providers to charge extra money from clients by terming them as ‘operating expenses’.

Separately, charges for all transactions in a financial year (broking, demat, custody etc.) through self or associates has been capped at 20% by value per associate (including self) per service. Any charges to self/associate cannot not be at rates more than that paid to the non-associates providing the same service.

Exit loads

Exit loads in PMS offerings have been streamlined, preventing some providers from arbitrarily instituting unfriendly structures. In the first year of investment, maximum of 3% of the amount redeemed will be exit load. In the second year of investment, maximum of 2% of the amount redeemed will be exit load. In the third year of investment, maximum of 1% of the amount redeemed will be exit load. After a period of three years from the date of investment, there will be no exit load, the SEBI said.

Strengthening PMS industry

With an eye to strengthen compliance standards, PMS providers will henceforth have to follow certain norms. Portfolio managers have been directed to submit a certificate from the qualified Chartered Accountant certifying the net-worth as on March 31, every year based on audited account within 6 months from the end of Financial Year.

Also, a certificate of compliance with PMS Regulations and circulars, duly signed by the Principal Officer, within 60 days of end of each financial year needs to be given.

Further, details of non-compliance along with the corrective actions, if any, duly approved by Board of the portfolio manager must also be submitted.

The information about ‘investment approaches’ offered by Portfolio Managers, now has to be uniform across all types of regulatory reporting, client reporting, disclosure document, marketing materials and any such document which refer to services offered by Portfolio Managers.

Any description of investment approach provided by Portfolio Managers
has to include: (i) investment objective, (ii) description of types of securities e.g. equity or debt, listed or unlisted, convertible instruments, etc. (iii) basis of selection of such types of securities as part of the investment approach, (iv) allocation of portfolio across types of securities, (v) appropriate benchmark to compare performance and basis for choice of benchmark, (vi) indicative tenure or investment horizon and (vii) risks associated with the investment approach etc.

You can read RupeeIQ PMS coverage here


Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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