Non-Discretionary Portfolio Management Services (PMS) – Meaning, Benefits & Risks

There are various kinds of PMS (portfolio management services) that you will find in India. These include everything from discretionary PMS to non-discretionary PMS, advisory PMS, and more. In this article, we will look more closely at non-discretionary portfolio management services, their key benefits, disadvantages/risks, and differences from their discretionary counterparts.

What is Non-Discretionary PMS?

The non-discretionary PMS meaning is an investment service where the portfolio manager gives the client research-driven recommendations on trades/investments. However, the client will have full authority to make the final decision regarding buying/selling. The manager functions as the advisor and finally executes the trades in question once the investor offers his/her explicit approval or permission. What this means is that the investor always has direct control over the process and responsibility for portfolio decisions. 

It is a suitable service for experienced investors, professionals, active market players, and HNIs who desire expert advice with total portfolio control. The base fees in this case are mostly lower than discretionary PMS, although transaction charges may apply. The minimum investment required for the service is usually ₹50 lakh as per regulations. 

How Does Non-Discretionary PMS Work?

So, what is non-discretionary PMS? It is basically a collaborative approach to investments, where both the investor and the portfolio manager are involved. Here’s how it usually works: 

• The client and manager both define the investor goals, risk profile, investment horizon, etc. 
• The manager evaluates market data and offers specific buy/sell proposals to the investor 
• These recommendations, once approved by the investor, are then executed by the manager
• The manager also offers performance reports on a regular basis, functioning more as an advisor and executing only those transactions which are agreed-upon

Types of Portfolio Management Services

There are several types of portfolio management services that you should know more about. These include: 

• Non-Discretionary PMS- The manager only recommends buy/sell actions and then executes trades once the investor approves them. 
• Discretionary PMS- The manager holds full authority to make investment decisions without requiring the investor’s approval every time.
• Advisory PMS- The manager only gives advice and recommendations. The client is responsible for trade execution. 

Based on the asset class and strategy, there are other types of PMS, such as the following: 

• Active PMS- Outperforming particular market benchmarks with active research, management, and frequent trading
• Passive PMS- Monitoring and mirroring a market index with low turnover
• Equity PMS- Core focus only on stocks across various categories (small-cap mid-cap, etc.)
• Debt PMS- Core focus on bonds and other debt instruments
• Hybrid PMS- A blend of both debt and equity instruments in the portfolio 
• Multi-Asset PMS- Diversification into multiple asset classes, i.e. debt, equity, commodities, and more

Non-Discretionary PMS vs Discretionary PMS

Here are some of the key differences that you should know in case of the non-discretionary vs discretionary PMS debate. 

Benefits of Non-Discretionary Portfolio Management Services

Some of the main benefits of non-discretionary portfolio management services include: 

1. More Control- You retain the ultimate authority on investment decisions and trades. No execution is possible without your approval. 
2. Expert Insights and Personalization- You still benefit from extensive market analysis and research, along with specialized expertise of portfolio managers. 
3. High Transparency- There is real-time and complete visibility into your transactions, holdings, and portfolio status/performance. 
4. Customized Structures- This system enables your portfolio to be suitably customized as per your objectives, investment horizon, and risk appetite. 
5. More Affordable- The base management fees are lower than discretionary services. 
6. Direct Ownership- You can hold the individual securities in dedicated demat accounts. 

Risks of Non-Discretionary PMS

Some risks of non-discretionary PMS include: 

• Missing Opportunities & Delays in Execution- The need for client approvals leads to a time lag and delay between the recommendation and the final execution. This may lead to buying higher or selling lower in volatile markets. It may impact returns as well. So, it may lead to missed opportunities for portfolio growth or correction. 
• Flawed Decision-Making- Client authorization is necessary for trades and hence a lack of market knowledge or poor decision-making lead to underperforming investments that undermine the manager’s skills and knowledge. 
• Higher Behavioral and Operational Risks- It is a time-consuming process that requires the client’s continuous involvement. Hesitant, uninformed, or emotional decision-making by the client will only lead to poor outcomes for the portfolio. 
• Unsuitable for Non-Experts & Newbies- Beginners and non-experts will find this unsuitable, since they do not have the time or knowledge to actively track the portfolio. 
• No Provider Responsibility- The client holds the final responsibility for trade timing. Hence, managers cannot be held responsible for any resulting losses due to client delays. 

Suitability of Non-Discretionary PMS

Non-discretionary PMS is only suitable for the following types of investors: 

1. Those who have a sizable corpus to invest as per the regulations and are HNIs (high-net-worth individuals) 
2. Those who want a hands-on and more active involvement with their portfolios along with direct control and expert recommendations and research 
3. Ideal if you want to participate in and approve investment decisions with full customization of the portfolio 
4. Suitable for knowledgeable and experienced investors with an understanding of market dynamics and the time to actively track markets and approve recommendations 

SEBI Regulations Governing Non-Discretionary PMS

Here are some SEBI non-discretionary PMS regulations that are worth noting: 

• Non-discretionary PMS in India is governed under the SEBI (Portfolio Managers) Regulations of 2020. 
• The minimum investment required for the portfolio is ₹50 lakh while the provider should have mandatory registration with SEBI. 
• Investment in unlisted securities in this model is limited to 25% of the AUM (assets under management). 
• An independent, third-party custodian should hold the assets of the investor to combat any fund misuse.
• Managers have to provide regular reports on fees, performance, and risks. 
• A formal and written agreement should be there between the portfolio manager and client, outlining the fees, roles, risks, etc. 
• A compliance office has to be appointed by the provider to abide by the SEBI guidelines. 

Fees and Charges in Non-Discretionary PMS

The fees and charges are usually the following: 

• 1-3% per annum as the fixed management fee
• 10-20% as performance-based profit sharing above the hurdle rate
• Transaction and brokerage costs, including STT (securities transaction tax) and other statutory levies
• Custodian fees (monthly or annual) for holding securities 
• 1-2% as exit load for early withdrawals
• Audit/administration fee may apply on a per-account basis (mostly up to ₹1,200 per annum)

How to Choose the Right Non-Discretionary PMS Provider

Here is a checklist that you may find useful while choosing the right non-discretionary PMS provider. 

1. SEBI registration of the provider and a clean track record of compliance with a dedicated compliance officer 
2. Investment approach that matches your objectives
3. Overall track record and performance throughout multiple market cycles. The goal should be to spot risk-adjusted returns that are consistent instead of one-off high returns
4. A transparent reporting mechanism of the provider 
5. Fee structure and added costs 
6. The expertise of the fund manager and the reputation of the firm/provider in question 
7. Communication and support, i.e. how accessible the provider is to clients 
8. Read client reviews to evaluate the provider and ask about the process to be followed for trade approvals

Conclusion

If you are a busy professional or HNI who wants a more hands-on approach to portfolio management, non-discretionary PMS can be the solution you need. It blends your direct approval mechanism over trades and control over market timing with expert research and recommendations of portfolio managers. If you have the time and inclination to actively track markets and ensure swift approvals of suggested trades, the non-discretionary PMS model may be a good fit indeed.