Is personal finance industry becoming advisory in nature?

Securities and Exchange Board of India (SEBI) has recently made changes in Portfolio Management Services (PMS) regulations that have far reaching consequences. Nevertheless, in the long-term, it will prove to be beneficial for the growth of the industry. Below are the changes made to the PMS regulations:

1. No upfront fees can be charged to the clients, either directly or indirectly, by the Portfolio Managers. This means a ban in upfront commissions to the distributors. Therefore, according to this, distributors of PMS would be on all-trail model similar to mutual funds.

2. Brokerage at actual should be charged to clients as an expense.

3. The operating expenses (excluding brokerage), that is charged over and above the fees for PMS, must not exceed 0.50 per cent per annum of the client’s average daily Assets Under Management (AUM).

4. Exit load to be charged in the following fashion:

     a) In the first year of investment, maximum of three per cent of the amount redeemed.

     b) In the second year of investment, a maximum of two per cent of the amount redeemed.

     c) In the third year of investment, maximum of one per cent of the amount redeemed.

     d) Post three years from the date of investment, no exit load can be charged.

5. Charges for all transactions in a financial year (Broking, Demat, custody etc.) through self or associates shall be capped at 20 per cent by value per associate (including self) per service. Any charges to self or associate shall not beat rates more than that paid to the non-associates providing the same service. This can be a put back for the big PMS organisations having broking as their associates. HDFC, ICICI, Kotak, Edelweiss to name a few.

6. Like mutual funds, even PMS need to have a ‘direct plan’. Direct plans are those that need to be directly purchased from the service provider without any agent in between.

7. Further, they are also mandated to report performances net of all the fees and charges.

8. While calculating performances, they are now mandated to consider all cash holdings and investments in liquid funds.

Looking at the above changes, it seems that the shift is going to be more towards advisory nature. Though, this does not mean the end of distribution. But yes, distributors need to accept this change and change their approach towards distribution. They should indeed try to inculcate some of the essence of advisory for their betterment and growth.