Portfolio management services can be offered in different forms. This article explains the regulatory treatment of discretionary, non-discretionary, and advisory PMS and the key differences.
Definitions
Discretionary Portfolio Manager
A discretionary portfolio manager is one who under a contract relating to portfolio management, exercises or may exercise, any degree of discretion as to the investment of funds or management of the portfolio of securities of the client.
In Discretionary PMS, the portfolio manager makes all investment decisions in respect of the client's portfolio. The manager has complete autonomy to make investment decisions on behalf of the investor.
Non-Discretionary Portfolio Manager
A non-discretionary portfolio manager manages the funds in accordance with the directions of the client. The portfolio manager provides recommendations, but the final decision to buy or sell rests with the investors themselves.
Advisory Portfolio Manager
An advisory portfolio manager provides advice on portfolio approach, investment and divestment of individual securities in the client's portfolio, entirely at the client's risk.
Key Differences
Decision-Making Authority
| Aspect | Discretionary | Non-Discretionary | Advisory |
|---|---|---|---|
| Decision Maker | Portfolio Manager | Client | Client |
| Manager Role | Makes decisions | Provides recommendations | Provides advice |
| Client Role | Sets guidelines | Makes final decisions | Makes all decisions |
Control
Discretionary PMS: The manager makes all investment decisions independently. The manager has complete autonomy to make investment decisions on behalf of the investor.
Non-Discretionary PMS: The manager acts as an expert advisor but is restrained in final decision-making. The client controls all investment decisions and has to give the go-ahead for each buy/sell transaction.
Advisory PMS: The client makes all investment decisions. The portfolio manager provides advice only.
Regulatory Treatment
Discretionary PMS
Management of Funds: The discretionary portfolio manager shall individually and independently manage the funds of each client in accordance with the needs of the client, in a manner which does not partake character of a Mutual Fund.
Liability: The agreement shall contain a condition that the liability of a client shall not exceed his investment with the portfolio manager.
Investment Restrictions: The discretionary portfolio manager shall invest funds of his clients in the securities listed or traded on a recognized stock exchange, money market instruments, units of Mutual Funds and other securities as specified by SEBI.
Non-Discretionary PMS
Management of Funds: The non-discretionary portfolio manager shall manage the funds in accordance with the directions of the client.
Investment Restrictions: The portfolio manager offering non-discretionary services to clients may invest or provide advice for investment up to 25% of the assets under management of such clients in unlisted securities.
Advisory PMS
Nature of Service: The portfolio manager provides advisory services to clients, advising on the portfolio approach, investment and divestment of individual securities in the client's portfolio, entirely at the client's risk.
Investment Restrictions: The portfolio manager offering advisory services to clients may invest or provide advice for investment up to 25% of the assets under management of such clients in unlisted securities.
Compliance Requirements
Agreement
The agreement must specify:
- The type of service (discretionary/non-discretionary/advisory)
- Investment objectives and guidelines
- Fees and charges
- Liability provisions
Reporting
All portfolio managers must provide periodic reports to clients, but the content may vary based on the type of service.
Performance Reporting
Performance reporting requirements apply to discretionary portfolio managers, including disclosure of performance indicators calculated on the basis of 'time weighted rate of return' method.
Co-Investment Portfolio Manager
The Co-investment Portfolio Manager is a separate category that provides services only to investors of Category I or Category II Alternative Investment Funds and makes investment only in unlisted securities of investee companies where such AIFs make investments.
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on PMS structuring and compliance. Our securities law experts help clients choose the appropriate PMS structure, draft compliant agreements, and ensure regulatory compliance. Contact us for guidance on PMS structuring and other regulatory matters.