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PMS: Sebi moots liking fee to gain/loss from investment

business Updated: Jul 27, 2010 23:23 IST
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The SEBI on Tuesday suggested that a part of portfolio managers fee be linked to the profits their clients make from the markets, a proposal if implemented will protect a loss making investor from incurring further losses and shake up the portfolio management services industry.

The market watchdog Sebi today came out with a consultative paper on portfolio management services (PMS), suggesting that the portfolio managers be paid the performance based fee, only if the client gains from the capital markets. The proposal will help large investors from limiting their losses by way of paying a fixed fee to their portfolio managers.

PMS is a professional service offered by portfolio managers to their clients to help them manage their money. Portfolio managers manage stocks, bonds, and mutual funds of clients considering their personal investment goals and risk preferences.

"It is proposed to be advised that, henceforth, profit sharing performance related fees shall be charged on the basis of high water mark principle over the life of the investment," Sebi said in a consultative paper on proposed policy for 'Portfolio Managers Regulation of Fees and Charges' uploaded on its Website.

The high water mark principle means that if the portfolio value goes down and then recovers, the manager does not earn a fee till all losses have been made up.

At present, profit sharing performance related fees are usually charged by portfolio managers on exceeding a hurdle rate, or the minimum amount of return that a person requires before making an investment, as specified in the agreement.

Sebi said the performance fees could be paid every quarter and based only on the increase in portfolio value in excess of the previously achieved high water mark.

"All fees and charges shall be charged on the actual amount of clients' funds under management," it said.

"The proposals, if implemented, will shake up the PMS industry. It will go through transformation phase, but for investors it will be a standardisation and transparency in fees," SMC Capitals Equity Head Jagannadham Thunuguntla said.

Sebi also suggested that in case an investor seeks to partially withdraw funds, all fees and charges shall be proportionately charged based on the time after which withdrawal is made and the value of funds withdrawn, and the high watermark shall be adjusted accordingly.

Further, it said, the client agreement shall contain a separate annexure which shall list all fees and charges payable to the portfolio manager.

The market regulator has invited comments on the proposals from the public by August 9, 2010.