Portfolio managers can onboard clients either directly or through distributors. Each approach has distinct compliance requirements. This article explains the differences and regulatory obligations.
Direct Onboarding
What is Direct Onboarding?
Direct onboarding means the client is on-boarded directly with the Portfolio Manager without intermediation of persons engaged in distribution services.
Regulatory Mandate
Portfolio managers shall provide an option to clients to be on-boarded directly, without intermediation of persons engaged in distribution services.
Fee Structure
At the time of on-boarding of clients directly, no charges except statutory charges shall be levied.
Disclosure Requirements
Portfolio managers shall prominently disclose in its Disclosure Documents, marketing material and on its website, about the option for direct on-boarding.
Distributor-Led Onboarding
What is Distributor-Led Onboarding?
Distributor-led onboarding means the client is on-boarded through a person or entity involved in the distribution of portfolio management services.
Distributor Registration
Any person or entity involved in the distribution of portfolio management services shall obtain registration with the Association of Portfolio Managers in India (APMI).
Fee Structure
Fees or commission to distributors shall be paid only on trail-basis. Further, any fees or commission paid shall be only from the fees received by Portfolio Managers.
Compliance Differences
Distributor Supervision
Portfolio Manager Obligations:
- Ensure that distributors carry out distribution activities in compliance with PM Regulations
- Pay fees or commission to distributors only on trail-basis
- Ensure that prospective clients are informed about the fees or commission to be earned by distributors
- Ensure that distributors abide by the Code of Conduct
- Have mechanism to independently verify the compliance of its distributors with the Code of Conduct
- Ensure that, within 15 calendar days from the end of every financial year, a self-certification is also received from distributors with regard to compliance with Code of conduct
Distributor Code of Conduct
Distributors must adhere to a Code of Conduct that includes:
- Maintaining high standards of integrity, promptitude and fairness
- Acting with due skill, care and diligence
- Considering investor's interest, risk profiling and suitability
- Ensuring that commission or incentive shall never form the basis for recommending Portfolio Management Services
- Being fully conversant with the Disclosure Document, Investment Approaches, fees and charges
- Disclosing to the clients all material information
- Abstaining from assuring returns
- Abstaining from attracting clients through unethical means
Direct Onboarding Disclosures
Portfolio managers must:
- Prominently disclose the option for direct on-boarding
- Ensure no charges except statutory charges are levied
- Provide the same quality of service to direct clients
Regulatory Developments
APMI Registration for Distributors
SEBI has decided that any person or entity involved in the distribution of portfolio management services shall obtain registration with APMI. Portfolio Managers shall ensure that any person or entity engaged in the distribution of its services has obtained registration with APMI.
Direct Plans in PMS
Portfolio managers must offer direct plans similar to mutual funds. This provides clients with a no-distributor option.
Key Considerations for Portfolio Managers
Systems and Processes
Portfolio managers must have:
- Systems for direct onboarding
- Processes for distributor onboarding
- Mechanisms to distinguish between direct and distributor clients
- Compliance monitoring for distributors
Fee Management
Portfolio managers must:
- Ensure no charges for direct onboarding except statutory charges
- Pay distributor commissions only on trail-basis
- Disclose fees and commissions to clients
Record Keeping
Portfolio managers must maintain:
- Records of direct onboarding
- Records of distributor relationships
- Records of fee payments to distributors
Consequences of Non-Compliance
Regulatory Action
Failure to comply with onboarding requirements can result in:
- Enforcement action by SEBI
- Monetary penalties
- Suspension or cancellation of registration
Investor Protection
Non-compliance can lead to:
- Inadequate client understanding
- Hidden fees and charges
- Regulatory scrutiny
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on onboarding compliance for portfolio managers. Our securities law experts help clients implement direct onboarding, manage distributor relationships, and maintain compliance. Contact us for guidance on onboarding and other regulatory matters.