Rich give their managers more discretion

As the stock indices touch new highs, an interesting trend is shaping among wealthier investors. It seems more of these high net worth individuals are giving managers of their investments more freedom than they did before. As a corollary, this could also mean they are less confident of making their own investment decisions.

These trends are visible from the data on portfolio management services (PMS) released by the Securities and Exchange Board of India (Sebi) recently. Though some high-end funds have higher entry levels, Sebi rules prescribe Rs 25 lakh as the minimum for PMS.

Sebi rules prohibit these managers from offering any guarantees regarding returns on capital but the latter do woo clients with covert suggestions of 20-25 per cent annual returns and sometimes more.

Sebi classifies PMS service providers under three broad categories. The first is the discretionary one, where the manager has full discretion over the corpus and the investor does not have a say. The second category is non-discretionary PMS, where the client takes the call and execution is usually with the PMS. Under the advisory category, the PMS only offers advice; both decision and execution remains with the investor.

According to the recent Sebi data, the number of clients under the discretionary PMS touched a life high of 70,994 (from December 2010, from where Sebi archives exist). This is 54 per cent higher than the number reported at the end of March 2016.

The non-discretionary managers also recorded a decent growth of around 19 per cent in clientele.

On the other hand, the number of clients using advisory services fell to 1,482, from 2,285 at the end of the previous year. While they lost about a third of their clients in the past year alone, the fall is steeper if one considers the 11,000-plus clientele reported in 2012-13.

The number of discretionary clients tops the previous high of 70,524, reported at the end of October 2011. Six years ago, assets under management (AUM) were only a fraction of what these now are. Discretionary portfolio managers handled a corpus of Rs 1.58 lakh crore, putting the average size at Rs 2.24 crore. Today, with an AUM of Rs 9.67 lakh crore, the average investment of a client has also grown, to a little Rs 13.6 crore.

As with most capital market trends, these movements can also be traced back to regulatory changes. Two sets of regulatory moves have happened in these years. In February 2012, Sebi had enhanced the minimum size five times, from Rs 5 lakh. This triggered a declining trend, as many of the weaker players and their clients who could not meet the minimum size limits moved out. The number of clients in the discretionary segment started falling, while the other two categories gained incrementally.

This trend persisted till mid-2013, after which all categories began showing a declining trend. This was when the National Spot Exchange payment crisis had hit investors hard.

Apart from buoyant markets and investor sentiment that goes with this, the latest uptick in discretionary clients has coincided with Sebi's overhaul of the PMS regulations that enabled eligible foreign fund managers to offer services here. The Sebi move, cleared in September and given effect through subsequent notifications, itself was prompted by an income tax Act amendment in the 2016 Union Budget.

Have the latest changes brought in stronger entities, which will do good for both themselves and their clients, as every PMS claims to be? Time will tell.