9 things to look out for before selecting portfolio management service

In today's day and age, the discerning consumer is not easily swayed by off-the-shelf products and is more inclined to put his money on companies that engage in a higher level of customisation and engagement. Similarly, in the financial world, as income and subsequent wealth levels are burgeoning, sophisticated investors are demanding professional advice that is customized to reflect more than just their risk/return objectives. The market is teeming with investment avenues which can be likened to off-the-shelf products. Portfolio management services (PMS) is a service offered by professional money managers to the more discerning investors, which can potentially be tailored to meet specific investment objectives. In the last decade, PMS has evolved to become one of the top investments in the Indian capital markets. As per the December 2015 bulletin of the securities exchange board of India (Sebi), total assets under management (AUM) of the PMS industry had increased by 1.6% to Rs 9,94,588 crore in November 2015 from Rs 9,94,588 crore in October 2015. As on November 30, 2015, AUM of discretionary PMS constituted 76.1% of the total AUM of PMS followed by advisory PMS (18.4%) and non-discretionary PMS (5.5%). As per Sebi guidelines, only those entities that are registered with the regulator for providing PMS can offer said services to the client. Additionally, Sebi has also provided the minimum investment required to open a PMS account should be Rs 25 lakh. Portfolio management services are offered by banks, brokerages, asset management companies, and independent investment managers.

Getting down to brass-tacks
PMS providers can offer both standardised products as well as investments that are tailor-made to adhere to clients goals. The investor and the PMS provider usually enter into a legally binding agreement which specifies the nature of the service provided, the goals of the investor, risk profile of the investor, investment strategy and other details. The client can then invest the minimum stipulated amount either through cheque/money transfer or by transferring existing shares held by the client to the PMS account. The portfolio manager then creates a portfolio of stocks based on the client's investment objective, which is held in a demat account opened in the name of the client/investor and can be transferred back to him in the event that he decides to close the PMS account.

Types of PMS
There are broadly three kinds of PMS which basically differ in the degree of participation in the investment process by the client.

Discretionary PMS: In a discretionary PMS, the client gives the portfolio manager the authority to undertake investment/trading decisions on his behalf. In this case, the investment is at the discretion of the portfolio manager and the client has no involvement in the investment process. The client can, however, give the investment manager a list of negative stocks or industries which are to be avoided.

Non-discretionary PMS: Under this service, the primary role of the manager is to act as an investment counsellor to the client. The portfolio manager only provides the client with investment ideas while the final choice and the timing of the investment rests solely with the client. However, the actual execution of the trade is done by the portfolio manager.

Advisory PMS: In an advisory PMS, an investment manager only provides the client with ideas, while the decision to trade as well as the actual trade can be executed by the client.

Fee structure
Generally, the fee structure for portfolio management services is flexible in nature and gives the client the advantage of choosing between a fixed management fee and/or a performance-linked fee structure. The method of charging is however decided at the inception and documented in the agreement. The different types of charges are elucidated below:

Entry load: PMS products have an option of charging the investor an entry load at the time of purchasing the PMS.

Fixed management fees: In this type of structure, the portfolio manager levies a fixed charge which may vary between different products. It is usually charged on a quarterly basis and can also be charged annually.

Profit sharing/performance linked charges: In this type of structure, along with a fixed fee, the portfolio manager charges a certain amount/percentage of profits over and above the stipulated fund return. The fund manager can claim a certain percentage of profit over and above a pre-determined hurdle rate. In profit sharing PMS, the percentage of fixed fee is usually lower.

In addition to the above, all charges linked to equity investments like custodian fees, demat account opening charges and transaction brokerage is chargeable to the client.

Advantage of PMS
Availing portfolio management services is the optimal way by which investors investment decisions which are designed to meet their wealth creation goals with the help of expert advise and assistance. Other advantages are as follows:

Access to innovative and sophisticated strategies which can provide the client with an opportunity to choose from an array of investment opportunities.

Higher degree of customisation usually takes into consideration individual investment needs and goals, with the investment philosophy to help clearly reflect the risk profile of the investor.

Ability to take focused positions in both stocks and sectors has the added advantage of being beneficial once the true potential of the idea is realised over a period of time.

Transparency and a higher level of information: Most PMS providers are technologically savvy and provide the client with real-time ccess to portfolio positions and value. PMS managers are directly accountable to the client, who can seek clarifications at will.

Choosing the right PMS
Choosing the right PMS provider is essential to maintaining long-term portfolio discipline and in meeting an individual's financial goals. It should be a logical decision based on an array of information relating to the risk-adjusted performance of the portfolio manager, quality and experience of the portfolio manager, fee structure and transparency in reporting and communication.

Risk-adjusted return
While choosing a PMS provider, it is important to start with by evaluating the portfolio manager's past performance relative to a benchmark. As an investor, one can take it one step further and compare various PMS providers who have a similar investment mandate. While there is no guarantee that historical performance can or will be replicated, it is a good indicator of the managers' skills and discipline. In addition to returns, it is also imperative to evaluate the risk-adjusted return of the provider. Various tools like the sharp ratio and portfolio beta can be employed to assess the same.

Quality of portfolio manager
Given the fiduciary nature of the relationship, an ideal portfolio manager would be someone with whom one can maintain a collaborative relationship. One can start with examining the quality and discipline of the PMS providers and look at factors such as experience and qualifications of both the portfolio manager and the support staff.

Fee structure
Understand the type of fee structure which would be best suited to you as an investor and would justify the quality of services provided by the PMS team.

Transparency
The investment philosophy and decision-making process should be clearly outlined in the agreement. Additionally, the PMS providers should maintain a high degree of transparency with timely and accurate reporting.

To sum it up, a PMS can provide investors with a transparent, highly skilled and customised platform for investments, which are designed to help in long-term wealth creation and help enhance risk-adjusted returns.

The writer is senior portfolio manager, BNP Paribas AMC