Sebi proposals to make portfolio management transparent, investor friendly

The Securities and Exchange Board of India (Sebi) recently came up with a set of proposals to make portfolio management services (PMS) more transparent, standardise the offerings and make them more investor-friendly. 

While some significant changes have been recommended, the committee has partially touched upon the fee structure, a problematic area for investors to understand.

A PMS can have multiple fee structures which include a fund management fee, profit sharing, and so on. There is no cap on any fee a PMS charges its clients. 

“Due to an increase in competition, most PMS now charge a fund management fee of up to 2.5 per cent and then profit sharing. But as the regulator is planning to standardise the offerings, it should have also capped the different fees that a PMS can charge its clients,” said R Pallava Rajan, founder and director, PMS Bazaar, which offers data and PMS advisory services. 

The proposals, however, specify the methodology for a PMS to charge performance sharing fees to its clients.

Among the significant recommendations for investors, the working group has proposed to raise the minimum investment amount to Rs 50 lakh from the existing Rs 25 lakh. “PMS is a risky product. Increasing the minimum investment threshold ensures that only savvy investors who understand the nuances opt for them,” said Amit Jain, co-founder and head, Ashika Wealth Advisors.

The consultation paper also proposes to standardise performance reporting. At present, PMS providers use different approaches to report their performance, although Sebi has asked them to follow a standard format. 

Non-standard reporting formats make it very difficult for prospective clients to compare performances of the PMS providers and take informed decisions. Sometimes, fees are not included when giving outperformance and at times the performance is given out on simple average returns. 

There have been instances of PMS providers not specifying the benchmark or changing it arbitrarily.

In its recommendations, the working group has laid out a new standard format that PMS providers will need to follow plugging the earlier loopholes. Also, PMS providers would need to calculate returns using time-weighted rate of return (TWRR) and all cash and investments in liquid funds must be mandatorily included. 

Performance has to be reported net of all fees, expenses and taxes.

Providers have been giving out high commissions to distributors, which caused the latter to push PMS heavily. The Sebi working group has proposed that distributors in PMS should be paid via the all-trail model, the way mutual fund distributors are paid. 

It means that there won’t be any upfront commissions. Recommendations also propose that until separate norms are formulated for certification of PMS distributors, only those distributors that have passed the National Institute of Securities Markets (NISM) mutual fund exams can sell PMS products.

The expert panel has also suggested placing caps on exit load. The maximum exit load that a PMS can charge a client who exits within a year should be up to 3 per cent. 

It would be 2 per cent for those leaving in the second year, and 1 per cent for those exiting in the third year. Clients who stay beyond three years are exempt from any exit load.

While the panel has avoided stringent classification for different PMS offerings, it has proposed that PMS providers must define the investment approach and stick to it. “In many cases, the theme of a PMS fund does not reflect the stocks it holds,” said Rajan.