Capital market regulator the Securities and Exchange Board of India (Sebi) has proposed a uniform fee structure for portfolio management services (PMS). The move follows complaints from investors that they were being over charged by PMS providers. In a discussion paper issued on Tuesday, 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 the 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 agreements. The regulator has 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. “For the purpose of charging performance fee, the frequency shall not be less than quarterly. The portfolio manager shall charge performance based fee only on increase in portfolio value in excess of the previously achieved high water mark,” said the Sebi consultative paper.
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 by the client, all fees and charges should be proportionately charged based on the time after which withdrawal is made and the value of funds withdrawn and the high watermark should be accordingly adjusted.
The Sebi discussion paper has also said that in the agreement between the portfolio manager and the client, the liability of the investor should not exceed his investment with the portfolio manager.
“To ensure transparency and adequate disclosure regarding fees and charges, the client agreement shall contain a separate annexure which shall list all fees and charges payable to the portfolio manager,” the regulator said.
“This clarity will help investors who are usually clueless about the fee computation. However, putting any cap will be difficult as every scheme can’t be same,” said an official at a domestic brokerage house will offers PMS.
Source : Economic Times
Photo : starnest.com
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