Portfolio Management Services Vs Investment Advisory Services February 1, 2023 C S Megha Post in Investment Advisor,Latest Blog,Portfolio Management Services (PMS),SEBI The last amendment in Investment advisers’ regulations has placed restrictions on charging fees, providing distribution services to advisory clients, and charging fee for execution services. With the changed regulatory outlook of SEBI over the Investment advisers, many Investment advisers in the industry are weighing the option to switch to Portfolio Management services. To facilitate the decision-making, we have compiled the point of difference between Investment Advisers registration and PMS Registration, covering both compliance and operations aspects. The same should facilitate you in taking the decision to switch. Registration Requirement Point of DifferenceRegistration under SEBI (Portfolio Managers), Regulations, 2020Registration under SEBI (Investment Advisers), Regulations, 2020Entity TypeOnly Body corporates i.e. LLP or companyManpowerMinimum three people are required1. Principal officer with requisite qualification (Post Graduate or Professional) and experience (5 Years in the securities market out of which minimum 2 in investment advisory or fund management)2. Compliance Officer3. One more employee requisite qualification (Graduate) and experience (minimum 2 in areas related to portfolio management or stockbroking or investment adviser or fund manager)Individuals-An investment adviser with requisite qualifications (Post Graduate or Professional) and 5 Years of experience Non- Individuals-o Principal officer with requisite qualification (Post Graduate or Professional) and 5 Years of experience management)o Compliance OfficerNet-WorthINR 5 CroresIndividuals-INR 5 LakhsNon-Individuals-INR 50 Lakhs Services Offered Sr. No.Point of DifferenceRegistration under SEBI (Portfolio Managers), Regulations, 2020Registration under SEBI (Investment Advisers), Regulations, 20201.Type of Service(a) Discretionary Services: Under the discretionary PMS, the choice as well as the timings of the investment decisions rest solely with the Portfolio Manager and the Portfolio Manager can exercise any degree of discretion in the investments or management of assets of the Client. The Portfolio Manager’s decision (taken in good faith) in the deployment of the Client’s account is absolute and final and cannot be called in question or be open to review at any time during the period of the Agreement or any time except on the ground of fraud, malafide intent, conflict of interest (other than those already disclosed in the Agreement) or gross negligence. (b) Non – Discretionary Services: Under the non-discretionary PMS, the assets of the Client are managed in consultation with the Client. Under this service, the assets are managed as per the requirements of the Client after due consultation with the Client. The Client has complete discretion to decide on the investment (quantity and price or amount). The Portfolio Manager, inter alia, manages transaction execution, accounting, recording or corporate benefits, valuation, and reporting aspects on behalf of the Client. (c) Advisory Services: The Portfolio Manager may provide investment advisory services, in terms of the Regulations, which shall include the responsibility of advising on the Portfolio Investment Approach and investment and divestment of individual securities on the Client Portfolio, for an agreed fee structure and for a defined period, entirely at the Client’s risk;(a) Financial Planning and Advisory Services:The Investment Adviser may provide investment advisory services, in terms of the Regulations, which shall include the responsibility of advising on the investment and divestment, for an agreed fee structure and for a defined period, entirely at the Client’s risk;The Investment Adviser may also provide holistic and professional advice according to the client’s needs. The advisors offer comprehensive financial guidance by assessing clients’ financial needs and risk tolerance.2Power of AttorneyThe clients of Portfolio Manager may execute Power of Attorney in favor of the Portfolio ManagerThe clients of the Investment Adviser cannot execute Power of Attorney in favor of the Investment Adviser3Distribution Services in Financial productsPortfolio Manager can also provide distribution services to its clientsInvestment Advisers cannot provide distribution services to its advisory clients4Execution Services in terms of brokingPortfolio Manager can also provide execution services to its clients and charge fees for the sameInvestment Advisers can also provide execution services to its clients; however, they cannot charge fees for the same5Minimum corpus/ Asset under Advise or ManagementMinimum INR 50 LakhsNo Such Restriction6FeeThe only restriction is not to charge any upfront feeFee restricted to below-1. Fixed fee mode- Maximum INR 1.25 Lakhs per annum2. Variable fee mode- Maximum 2.5% of Assets under Advisory7Trading RestrictionsAs per the regulation-A portfolio manager shall not execute any trade against the interest of the clients in its proprietary account. Primarily indicates that the portfolio manager shall not take contra position in the securities bought/sold in clients’ portfolio or advised to the clients under its PMS services. As per the regulation-An investment advisor shall not enter into transactions on its own account which is contrary to its advice given to clients for a period of fifteen days from the day of such advice. Primarily indicates that the Investment Adviser shall not take contra position in the securities advised to the clients under its PMS services. 8Periodic Reporting to SEBIMonthly reporting is to be done on SI Portal.Multiple year-end reporting to be done to SEBINo such Mandate9Client reportingQuarterlyNo Such mandate10Audit Requirement· PMS internal compliance audit· Client Account Audit· Performance AuditIA Annual compliance audit Conclusion- The decision to switch to PMS should be an informed decision to avoid any surprises later on. Given the regulatory restriction placed over Investment advisory services, below are the primary benefits of PMS registration which are to be taken into consideration- Fee– As a PMS service provider you may structure the applicable fee without any restriction which includes charging fixed fees and performance fees without any upper limit. The only limitation is not to charge any upfront fee. Distribution Service– As a PMS service provider you are not restricted to providing distribution services to your PMS clients. Execution Services– As a PMS service provider you are not restricted to charging fee for execution services to your PMS clients Power of Attorney– The clients of the Portfolio Manager may execute Power of Attorney in favor of the Portfolio Manager, the same facilitates the execution of advice effectively in clients’ accounts. Further, under the discretionary PMS, the choice, as well as the timings of the investment decisions, rest solely with the Portfolio Manager, and the Portfolio Manager can exercise any degree of discretion in the investments or management of assets of the Client. However, it is also to be considered that PMS registration comes with slightly higher compliance requirements along with a higher registration fee of INR 10 Lakhs. ________________________________________________________________________________________________________________ Disclaimer: The views and opinions expressed herein are my personal views and opinions and do not necessarily reflect the official policy and position of any other agency, organization, employer or company. Assumptions made in the analysis are not of the position of any entity other than me. I make no representations as to accuracy, completeness, correctness, suitability or validity of any information and will not be liable for any errors, omissions or damages arising from its use. It is reader’s responsibility to verify their own facts. Share this:TwitterFacebookLike this:Like Loading... Related