Securities and Exchange Board of India (SEBI) has asked Portfolio Management service (PMS) providers to follow a uniform fee structure. According to wealth managers, this directive by SEBI to portfolio managers stipulating wealthy investors to charge performance fees only on the basis of product returns may not be enough to stem their ‘misselling’.
After SEBI received complaints from investors on being overcharged by PMS providers, the capital market regulator decided to bring in this transparent structure. Following these complaints, SEBI had verified some complaints and marked the differences in the clauses relating to fees and charges in the portfolio manager-client agreement and fees and charges payable by the client and the computation of those charges.
In case of an increase in the portfolio value, SEBI has directed portfolio managers to charge performance based fee from their clients. “What SEBI has looked into is just creating uniformity in profit-sharing between service providers and clients. While the move is a good first step, more needs to be done in this space,” said Om Ahuja, Head-Wealth Management, Emkay Global Financial Services .
As the wealthy individuals are now required to pay a fixed fee to their portfolio managers, this directive from SEBI will help the wealthy individuals restrict their losses. For the new clients, the new guidelines will be effective from next month and for the existing clients, the revised terms will be implemented from January 1, 2011.
“There is an urgent need to relook the way PMS providers charge clients. Many a time, it’s as high as six percent of the invested money and 50-70 percent of this goes to distributors,” said Sajiv Shah, executive director, Benchmark Asset Management.
At present, when the returns exceed a certain level, the performance related fees are usually charged by portfolio managers. A few months ago, the regulator had proposed that profit-sharing or performance-related fees should be charged on the basis of ‘high water mark principle’ over the life of the investment.
“Many investors, whose total corpus does not exceed 15 lakh, have been lured into investing a major chunk of their savings in PMS products. Officially, there is nothing wrong, but this is nothing but ‘misselling’,” said a wealth manager.
Asset Management companies (AMCs) have been lowering the minimum requirement to invest in their PMS in an unauthorized manner so that more investors could be accomodated and distributors could also be compensated for selling equity schemes.
