The fee charged by portfolio managers will soon be linked to the profits they have been able to make for their clients, with capital market regulator Sebi asking portfolio management service (PMS) providers to follow a uniform fee structure.
On Tuesday, Sebi said that portfolio managers could charge performance-based fee from their clients only if there is an increase in the portfolio value.
The move is aimed at helping wealthy individuals limit their losses since they are now required to pay a fixed fee to their portfolio managers. The new norms for all fresh client agreements will become effective starting next month. While for existing clients, the revised terms will be implemented from January 1, 2011.
Sebi’s decision to bring in a transparent structure follows complaints from investors that they were being overcharged by PMS providers. The regulator said that it had scrutinised some of the complaints and observed discrepancies 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.
Currently, performance-related fees are usually charged by portfolio managers when returns exceed a certain level (known as ‘hurdle rate’ in industry parlance) as specified in the client agreement. 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. The high water mark principle means that if the portfolio value declines and then recovers, the manager does not earn fees till all the losses have been made up. High water mark will be the highest value that the portfolio has reached.
Besides, value of the portfolio for computation of high water mark should be taken to be the value on the date when performance fees are charged.
The regulator also said that all fees and charges should be charged on the actual client funds under management. In case of partial withdrawal of funds or contributions by the client, the performance fees should be charged after appropriately adjusting the high water mark on a proportionate basis. Portfolio management service is a professional service offered to high net worth individuals to help them manage their investible surplus.
