SEBI bans upfront distributor commissions in PMS, introduces direct plans

In a circular released on 13 February, it also prohibited them from paying upfront commissions to distributors, who would be allowed to receive only trail commissions. SEBI also introduced a ‘direct’ option for PMS investors who do not wish to invest through distributors which would not include distribution fees.

PMS providers can continue to charge annual fees, as a percentage of the investor’s corpus.

The circular comes on the back of several other regulations affecting PMS which have been introduced by the regulator over the last couple of months such as raising the minimum ticket size for PMS from ₹25 lakh to ₹50 lakh. The circular will become effective 1 May.

The CEO of a mid-sized PMS firm who did not wish to be named, said the current wording of the circular on direct plans is unclear. As it stands, there is no explicit requirement for direct plan costs to be lower than regular plans. Another PMS Chief Executive expressed reservations about the circular on condition of anonymity. “PMS clients are sophisticated. They are aware of the charges they are paying and the nature of the product. They should not be treated in the same way as mutual fund clients,” he said. The ban on upfront commissions for distributors and the introduction of a direct option, brings PMS products closer to mutual funds in structure.

The SEBI circular also tightened norms for PMS distributors in various ways. According to the SEBI circular, PMS distributors must have a valid AMFI registration number for mutual fund distributors or the NISM Series V A exam. They must also abide by a code of conduct laid down by SEBI and PMS managers must monitor compliance with the code of conduct. SEBI also placed restrictions on the exit load that PMS providers can charge. According to the circular, PMS providers can charge a maximum exit load of 3% in the first year of investment, 2% in the second year and 1% in the third year. Thereafter, PMS providers cannot charge any exit load.

“The distribution model of the wealth management industry will probably shift to an advisory model due to these regulatory changes. This might disrupt PMS flows momentarily as MF sale becomes equally attractive to distributors as PMS. Our experience is that transparency faces initial hiccups but ultimately leads to faster growth for any industry, we expect the same for the alternative investment industry,” said Sushant Bhansali, CEO, Ambit Asset Management, a major PMS provider. “With increasing transparency, misselling will temper down and client trust will increase thereby leading to faster industry growth,” he added.

In January, SEBI had mandated use of the ‘time weighted rate of return’ method for reporting PMS performance in a discretionary PMS. A discretionary PMS is one in which client consent is not required for each transaction. In the new circular, the regulator also further tightened reporting norms for portfolio managers. PMS providers must consider cash and their holdings in liquid funds while reporting performance. The performance must also be reported, net of fees and taxes. The PMS manager must also disclose any change of investment approach that can affect client portfolios in the marketing material.

The circular also capped ancillary charges such as broking and demat services from the associate arms of the PMS provider at 20%. “This will affect big firms who have associated broking arms who were making money through these types of charges,” said the first PMS CEO mentioned above. “Such PMS providers will have to go to other brokerages for part of their business,” he added.