Sebi for rationalising PMS fee structure

The Securities and Exchange Board of India (Sebi) on Tuesday put out a consultative paper on fees charged by portfolio management service (PMS) providers. It seeks to clarify on the fees to be paid by client and its calculation. Comments have been invited on the document till August 9, 2010.

Portfolio management services are offered by asset management companies and brokerages. They manage a set of securities belonging usually to investors in the higher income bracket.

The regulator had been receiving complaints from clients relating to fees and charges being levied by portfolio managers. On examining the complaints, Sebi noticed that there was lack of clarity over charges in the agreements signed by PMS clients.

In the paper, Sebi clarified that the liability of a client should not exceed his investment with the portfolio manager and asked that a list of all fees and charges be provided to investors as part of the agreement in a readable font.

It has also advised portfolio managers that performance-related charges should incorporate a high water mark principle.

Consider a portfolio worth Rs10 lakh. It goes up to Rs15 lakh by the end of one year, and to Rs12 lakh by the end of the second year. In the first year, there would be a performance-related charge, but this cannot be charged in the second year.

If in the third year, the portfolio’s worth rises to Rs17 lakh, the additional Rs2 lakh earned over the previous Rs15 lakh mark would be eligible for a performance fee.

The industry already follows a similar system, said experts. “Most people follow a combination of hurdle rate and the high water mark, where there would be a sharing of profit when it goes beyond a pre-set level of return,” said Sandip Sabharwal, chief executive officer, PMS at Prabhudas Lilladher.

“Using a highwater mark is part of the best practices for the industry already. Nevertheless, it is a progressive step and now everyone is likely to follow the system,” said Rajeev Thakkar, CEO at Parag Parikh Financial Advisory Services.

The high water mark would be calculated on the basis of the value on the date when performance fees are charged. Moreover, the fees cannot be charged at lesser than a quarterly basis.

Additionally, charges would have to be based on the actual assets under management. If there is a partial withdrawal in the interim period, the high water mark and the fees would be adjusted proportionately.