Difference Between Discretionary PMS, Non-Discretionary PMS, and Advisory PMS

There are various types of portfolio management services as you will find out. These include discretionary, non-discretionary, and advisory PMS, each with varying levels of control over decision-making and execution of trades. You should know more about all of these types before coming to a final decision on which type suits you best. Here are the key aspects worth noting in the discretionary PMS vs non-discretionary PMS vs advisory PMS debate. 

What is Portfolio Management Service (PMS)? 

PMS (portfolio management service) is a tailored and professional investment service designed for busy investors and HNIs (high-net-worth individuals) that build and manage portfolios of stocks, debt, commodities, and other securities to achieve specific financial goals of clients. 

PMS enables direct asset ownership, while coming with minimum investment regulations as well. Professional managers handle research, risk management, and trading, depending on the PMS type that is followed. Portfolios are also personalized to the risk profiles of investors and financial objectives. 

What is Discretionary PMS?

The discretionary PMS meaning is basically a professional investment management service where the SEBI-registered portfolio manager has the complete authority to make all the buying, selling, and asset allocation decisions on the client’s behalf. It is tailored for HNIs and busy investors who have the corpus to invest and want a hands-off approach towards building and managing their portfolios. This approach ensures quicker execution since client approvals are not required for every transaction. 

What is Non-Discretionary PMS?

The non-discretionary PMS meaning is essentially an investment service where the portfolio manager offers research-driven recommendations and strategies to investors, although client approvals are needed for executing trades. Once the client approves these recommendations, the portfolio managers execute the trades on the client’s behalf. This is more suited to HNIs and professional investors who want more active control over their portfolio decisions while gaining access to expert research and insights. 

What is Advisory PMS?

On the flipside, the advisory PMS meaning is that of an investment service where portfolio managers offer personalized recommendations and investment strategies, although the client holds the full control and responsibility for executing trades independently. This suits people who have market knowledge and the time to actively manage and execute trades, while gaining access to professional expertise and recommendations. This model ensures the highest level of control for investors.

Key Differences Between Discretionary, Non-Discretionary, and Advisory PMS

Here is a PMS types comparison guide for you to understand the key differences. 

Decision-Making & Execution – How the PMS Types Differ

Now that you know the difference between discretionary PMS and non-discretionary PMS and also the differences of these types from advisory PMS, it’s time to explore some other aspects. How do they differ in terms of execution and decision-making? Here is a guide to the same. 

Benefits of Each PMS Type

Here is a guide to knowing more about the benefits of each PMS type. 

Benefits of Discretionary PMS

• Ideal if you want a hands-off approach and professional managerial expertise
• Quick trade execution and portfolio rebalancing in times of volatility or upon spotting new market opportunities 
• Disciplined and customized approach towards portfolio management 

Benefits of Non-Discretionary PMS

• Full control over investment/trade decisions for the investor 
• Access to expert insights and professional recommendations or strategies 
• Flexible alignment of portfolios with investor preferences 
• Lower trade frequencies with minimal buying and selling of securities, thereby lowering the costs of transactions

Benefits of Advisory PMS

• Full investor control over all the decision-making and execution of trades 
• Access to professional recommendations and insights 
• Lower fees compared to discretionary and non-discretionary services 
• Highest level of personalization for investors 

Risks and Limitations of Each PMS Type

Each PMS type has its own set of risks and limitations. Here’s looking at the same below: 

Risks in Discretionary PMS

• Total loss of investor/client control which may lead to managerial/operational risks if the manager’s views do not align with the investor 
• The performance is fully dependent on the expertise, knowledge, and skills of the portfolio manager
• Discretionary PMS can be costly in terms of higher management and performance fees, along with potential exit loads, which may eat into net returns 
• There are concentration risks where managers often bet on a smaller number of stocks in particular sectors 

Risks in Non-Discretionary PMS

• Risks of time lags or delays due to the need for client approvals, leading to missed opportunities or slower corrective measures
• Poor trade timing since the client decision has to be obtained before managerial execution 
• Investors may sometimes reject data-based solid recommendations from managers due to bias and emotional or impulsive behavior

Risks in Advisory PMS

• Requires considerable time and effort from the investor 
• Full responsibility for timing, trade execution, and investment decisions rests with the investor
• There is high risk of underperformance in case the investor cannot ensure timely and professional execution 
• Operational risks including errors when investors execute trades based on the advice that is received 

Some common risks for all the types include general market risks, tax or regulatory risks due to policy changes, and liquidity risks (difficulty in selling small-cap or unlisted securities during market corrections, which may otherwise lead to higher exit costs). 

Suitability – Which PMS Type Is Right for You?

You may choose discretionary PMS if you want a hands-off approach to portfolio building and management. It gives you access to professional investment management, risk management, and swift and timely execution of trades. If you want more control over trades/investment decisions, choose non-discretionary PMS. Here, your approval is required for the execution of any trade by the portfolio manager. However, it does require more time and market tracking which you should be ready to ensure. 

Advisory PMS is suitable if you are only looking for expert advice and recommendations, but want full responsibility to decide on investments and execute trades yourself. Of course, you should be an experienced and seasoned investor with the time to do it on your own.

SEBI Regulations Governing PMS Types

There are several SEBI regulations governing all the types of portfolio management services under the Portfolio Managers Regulations, 2020. Some of them include: 

• The minimum investment amount for PMS is ₹50 lakhs
• The PMS provider has to maintain a minimum net worth of ₹5 crore 
• Periodic reports are mandatory from providers (at least quarterly) on the fees, performance, and risks 
• Upfront fees are capped at 25% of the total fees 
• There has to be a mandatory independent custodian to hold the assets of the client 
• The PMS provider has to mandatorily appoint a dedicated compliance officer to abide by the SEBI regulations 
• Annual audits are also required for accounts while managers cannot guarantee any returns to clients 
• Unlisted securities are not allowed in discretionary PMS, while investments in related parties/associates is restricted to 30% of the Assets Under Management (AUM), subject to the client’s consent
• Leverage and borrowing is not allowed for equity portfolios 

Fees and Cost Considerations Across PMS Types

The usual PMS fee structure is the following; 

• 1-2.5% of the AUM (assets under management) as the fixed fee or management fee
• There are often performance-based or profit sharing fees which apply only when the returns surpass a particular hurdle rate 
• Hybrid fee models are often observed, where a lower fixed management fee combines with a performance fee 
• Other charges include entry load (one-time) of 1-3%, exit load for early withdrawals (1-3%), transaction and brokerage charges (may be higher for frequent buying and selling), and custodian and audit fees
• GST of 18% is also applicable on the management fee

Discretionary PMS has the highest costs while they are slightly lower for non-discretionary PMS. Advisory PMS has the lowest charges in most cases. 

Conclusion

As you can see, all three types of portfolio management services have their own benefits and risks. There is no best type in this case; you have to choose the one that works for you, depending on your own market knowledge, financial objectives, investment approach, time availability, and other factors. Compare the three models carefully and make your choice accordingly.