Financial markets regulator, the Securities Exchange Board of India (SEBI), issued new guidelines for portfolio managers on Thursday. These fresh regulations are expected to cut costs for investors and bring more transparency in the way portfolio management services are offered.
SEBI has made it clear that portfolio managers cannot levy upfront fees in any form from clients. Some service providers used to charge set-up fees, of 0.5-2 per cent, from clients depending on the amounts invested. Doing away with the set-up fee brings down costs for investors.
The regulator has further capped operating expenses. Operating expenses charged for portfolio management service (PMS) shall not exceed 0.5 per cent a year of the client’s average daily assets under management (AUM). “Some PMS providers were charging fees on the higher side. Also there have been some incidental expenses for which there was no explanation given to the investors,” says Daniel GM, founder and director of PMSBazaar.com. He pointed out that the custodian fees of 0.25 per cent levied by some PMS providers is on the higher side. Putting an overall cap on expenses will give a clear picture to investors.
Brokerage costs too need to be charged on actuals. “Though some PMS providers are seen charging brokerage costs on the higher side compared to the 10 to 15 basis points norm in the market, the regulator may decide to cap them as well in future,” Daniel adds. The regulator has taken a view that the PMS providers’ expense should be fair and in line with broad market practices. “Sophisticated investors with large ticket sizes deserve disclosures and transparency when they invest in a PMS. The regulator has ensured that,” says Sunil Rohokale, MD & CEO of ASK Group.
Graded exit loads
The regulator has prescribed graded exit loads on PMS investments. An investor redeeming investments from a PMS within first year of investment, cannot be charged more than three percent as exit load. The numbers stand at two and one percent for exits in the second and third year, respectively. After the third year, a PMS provider cannot charge any exit load.
Up to half the annual management fee charged by a portfolio manager is paid as commission to the distributor, when a customer signs up for the PMS. However, from now on, no upfront commissions can be paid. “As SEBI bans upfront commissions, the bargaining power of the distributor goes down,” observes Chetan Phalke, CEO of Alpha Invesco Research Services.
The PMS provider can pay only ‘trail’ commission and fees and must keep the client informed about them at the time of signing up. “Trail commission for distributors and graded exit loads on investments, ensure that both distributor and investor opt for long term investments,” says Rohokale. Phalke says that as commissions are paid on ‘trail’ basis, most distributors will start thinking about long-term performance of the PMS than the commission they earn at the beginning.
SEBI has directed that the portfolio managers can engage only those distributors who either have a valid AMFI registration number or have cleared the NISM series V-A exam. Akhil Chaturvedi, associate director and head of sales & distribution, Motilal Oswal Asset Management Company, foresees exit loads falling below what is prescribed by the regulator, as the industry moves to ‘all-trail commission’ model. “As the trail commission gets paid out of the asset management fee earned by the portfolio manager, the need for steep exit loads goes away,” he adds.
Portfolio managers are asked to report performance data net of all fees and expenses (including taxes). Earlier the performance data was before fees and expenses. This makes performance comparison easy for investors.
Direct investments in PMS
The regulator has also asked portfolio managers to enable direct onboarding of clients. Direct plans are available for mutual fund investors and they benefit from lower expenses compared to the regular options. SEBI has asked the portfolio managers to provide such an option to the investor and the same must clearly mention it in the marketing material and disclosure documents.
Rohokale says that there will definitely be some financial incentive for the investor to go direct. However, as of now, the entire onboarding process is not done online. Signing of the power of attorney etc. is carried out offline.
Most portfolio managers will take some time to figure out the pricing of direct plans, as most investors are on the ‘low fixed management fee and profit share’ model.