Advisory Portfolio Management Services (PMS) – Meaning, Benefits & Risks

Advisory PMS (portfolio management services) is an investment service where the portfolio manager offers professional research, advice, and recommendations. However, the investor keeps full control over the execution of trades. Let us learn more about it below. 

What is Advisory PMS?

Advisory portfolio management services are investment services where portfolio managers offer professional recommendations and investment guidance along with research to investors, although the complete control over trade execution remains with investors. There are tailored strategies offered to HNIs and busy investors in this model. 

In this case, the advisory PMS meaning is clear- the manager only operates as a consultant for market insights, analytics, customized strategies, and recommendations. The investor holds the full responsibility for acting on this advice and executing suggested trades or transactions. It suits those who are experienced investors with ample knowledge and time to actively manage portfolios while tapping into professional guidance alongside. 

How Does Advisory PMS Work?

Now that you have an idea of what advisory PMS is, it’s time to look at how it works. These are the main components in this model: 

1. The Portfolio Manager’s Functions- The manager evaluates markets and does research on securities while offering personalized advice on selling and buying assets based on the investor’s objectives. 
2. The Role of the Investor- Investors get the recommendations and strategies before reviewing them. They hold the final responsibility for trade approval and execution. 

In this case, advisory PMS needs the active involvement of the investor in each and every transaction. Investors can customize their portfolios while accepting/rejecting recommendations freely. The investor has to execute trades through his/her brokerage account. This model is usually more affordable than discretionary or non-discretionary models owing to the advisor-only managerial role. There is higher transparency as well, since the investor is directly involved in each transaction. 

So, in this case, the advisory vs discretionary PMS differences are quite clear; the latter is where the investor gives full authority to the portfolio manager to make investment decisions or trades. In the non-discretionary model, the investor has to approve each decision, but the trade execution is then done by the manager. 

Benefits of Advisory Portfolio Management Services

There are several advantages of advisory PMS, including the following: 

• Access to professional expertise, research, insights, recommendations, and strategies backed by market knowledge and technical analysis
• Customized investment strategies tailored to your goals, investment horizon, and risk tolerance levels 
• You can actively track and rebalance your investments with full control in order to swiftly adapt to market volatility and other economic shifts
• Portfolios are usually diversified throughout multiple geographies, asset classes, and sectors in order to lower risks 
• You hold securities in your own demat account, giving you full control over transactions and holdings
• There is regular reporting on transactions, portfolio performance, and fees

Risks of Advisory PMS

Some of the risks of advisory PMS include the following: 

• Operational and managerial risks- The performance is quite dependent on the portfolio manager’s knowledge, expertise, and skills. Biases or poor strategies may lead to an adverse impact on the portfolio. 
• High charges- PMS has high brokerage, management fees, and performance-based fees to contend with. These may eat into your net returns in the long haul. 
• Market risks and concentration- Portfolios may be heavily concentrated in particular sectors. There may also be liquidity risks arising from investments in small-cap stocks, which may be difficult to sell during market downturns. 
• High initial investment- A sizable corpus is mandated for PMS, while there may be tax inefficiencies arising due to frequent trades and capital gains taxes. 
• Wrong timing- Investors/clients hold the full responsibility for trade execution. This may lead to errors resulting from wrong market timing, delays, and lags. 

Suitability of Advisory PMS

Advisory PMS in India are ideal for high-net-worth individuals (HNIs) with the ability to invest the minimum mandated amount. At the same time, you should be an experienced and knowledgeable investor with the time and inclination to actively monitor your portfolio and execute trades and investment strategies based on your advisor’s recommendations. 

This suits those who want the benefits of professional expertise and advice combined with total control over execution/trades. It also suits investors who want a higher level of customization with more flexibility and a long-term investment horizon.

SEBI Regulations Governing Advisory PMS

The SEBI advisory PMS guidelines include the following: 

• The SEBI (Portfolio Managers) Regulations, 2020 is the governing law for advisory PMS
• The minimum investment amount from the investor should be ₹50 lakh as per SEBI guidelines
• Portfolio managers must have SEBI registration and maintain ₹5 crore as their minimum net worth 
• The provider has to offer a proper disclosure document on the risks and fees to the investors
• The Principal Officer should have suitable professional qualifications (CA, MBA, CFA) along with NISM certification 
• There has to be a dedicated compliance officer along with mandatory annual audits
• Any change in management should only be proposed with 30 days given to clients for exiting minus any fees 

Fees and Charges in Advisory PMS

The usual fees and charges for advisory PMS are the following: 

• 1-3% of the portfolio value as the annual management fee
• 10-20% as performance-linked or variable fees may be charged by some providers. However, it only applies when the returns surpass a particular hurdle rate or benchmark
• The entry and exit loads are one-time charges and are usually between 1% and 3%
• There are operating expenses including transaction fees, brokerage costs, audit fees, and custodian fees 
• 18% GST is applicable on management fees and other services that are taxable

How to Choose the Right Advisory PMS Provider

Selecting the right advisory PMS provider means following this checklist: 

• SEBI registration of the provider
• Track record over 3-5 years and throughout multiple market cycles (both bear and bull markets)
• Investment philosophy (should be in sync with your goals and preferences)
• Fee structure and total costs 
• Regular reporting mechanism and transparent operations 
• Proper communication and accessibility 
• Client reviews and comparisons of multiple providers

You should tick off these aspects before finalizing the provider. 

Conclusion

Advisory portfolio management services are thus essential for investors who are willing to invest a sizable amount to build their portfolios and want hands-on control over trades and investment decisions. You also get access to research and professional expertise in turn.