PMS players experiment with pay-only-for-profit model, skip fixed fees

People who manage investment portfolios of the rich are increasingly pitching for a model where they are only paid for the profits they make.

Investors typically pay portfolio management services (PMS) providers an annual fixed fee of around 2 per cent of the money they manage. They also pay them a share of the profits made. This is usually around 20 per cent of gains above a certain threshold. This ‘two and 20’ model is giving way to a ‘zero and 20’ model, according to industry experts.

“We are increasingly seeing a trend wherein a service provider is willing to forgo fixed fees and agree to only ‘profit-share’. Essentially, the investor has to pay only when the returns are above the hurdle rate. Under this, there is onus on the fund manager to generate returns,” said Roopali Prabhu, director-head of investment products, Sanctum Wealth Management.

“We have recently launched a zero fixed fee model,” said Akhil Chaturvedi, associate director-head-sales and distribution at Motilal Oswal Asset Management Company — one of India’s largest PMS players.  He said the model, which is on a select distribution channel basis, was started three months ago. The idea was to encourage investors to not desist from investing in equities merely due to fees being levied in volatile times. Such investors would pay a certain percentage on profits on annual basis only when a certain basic hurdle on return is achieved, which in this case is 6 per cent.

Typically, the hurdle rate can vary between 6 per cent and 10 per cent, depending on different variable fee models. Others in the industry are also likely to see similar zero fixed fee models, said Chaturvedi.

Daniel G M, founder-director at industry tracker PMSBazaar, said the balance has shifted in favour of investors from portfolio managers. Regulatory changes, such as the introduction of a direct option, are also a tailwind. The emergence of a pay-only-for-profit model to challenge the fixed fee model will not be a temporary trend, as investors are now evaluating fees and not just the performance. “This will also co-exist,” he said.

The model has emerged during a period of regulatory change.

The Securities and Exchange Board of India recently doubled the minimum investment size to Rs 50 lakh. It also raised the net worth requirement from Rs 2 crore to Rs 5 crore.

A circular on recent changes also mentioned introducing a direct plan. This would mean investors can enter into a scheme without recourse to a distributor.

“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 their disclosure documents, marketing material and on their website, about the option for direct on– boarding,” said the circular dated February 13.

A large portion of the fixed fee in the first three years after an investor came on board often went to distributors, according to industry sources. The creation of a direct plan removes the need for high fixed fees. However, others also feel that given the limited presence and employee strength of these asset managers, a distribution network and appropriate fees may be necessary to garner assets.