Higher commissions and markets push portfolio management products

The trend has gained currency in the aftermath of the capping of MF commissions

Banks and wealth managers have started pushing PMS (portfolio management services) products to their high net worth (HNI or rich) clients in the past few months on the back of a sustained rise in Indian equities.  

The trend has gained currency in the aftermath of the capping of upfront commission on sale of mutual fund schemes and has led to concerns of misselling. Banks such as Citibank, Standard Chartered Bank, Kotak  Mahindra Bank, ICICI Bank, as well as wealth managers such as IIFL Private Wealth and Motilal Oswal are selling the product.

"The trend has picked up primarily because higher commissions are available in PMS. Distributors also fear losing their HNI clients if the regulatory mandate of disclosing commissions on sale of mutual funds to clients comes into play from October," said Manoj Nagpal, chief executive, Outlook Asia Capital.

Unlike mutual funds, upfronting commission of three-four years is possible in the case of PMS. Including upfront commissions and one-time set-up fees, PMS distributors can earn about five per cent in upfront charges, said experts. The set-up fee is negotiable and may vary from zero to two per cent of the assets managed.

Most banks have seen a sharp drop in commission from sale of mutual funds in FY16 - for instance, Citibank's commission dropped almost 40 per cent to Rs 140 crore from Rs 229 crore in the previous financial year.

"Historically, we have witnessed misselling of products whenever huge commissions are paid out," said a wealth manager who did not want to be quoted. "Banks are keen on getting their revenues upfront, which could mean their interests are not aligned with that of their clients," added Nagpal.

Experts also cautioned that clients need to watch out for higher exit loads, coupled with higher exit load tenure, which may result in clients paying stiff penalties while exiting due to changing priorities or market perceptions. An email to Citibank, Standard Chartered Bank, Kotak Mahindra Bank, ICICI Bank, and IIFL Private Wealth did not get a response.

Experts believe that reporting on PMS performance is still opaque and the market regulator has not found a way to address this. In 2007, several portfolio managers compromised on quality to generate alpha by investing in mid-cap and small-cap stocks, which subsequently led the regulator to raise the ticket size to Rs 25 lakh from Rs 5 lakh and mandate profit-sharing or performance-related fees be charged on a high watermark principle over the life of an investment.

"There are firms like us which have always been selling PMS, so it's not a change of strategy for us. However, there are number of players that have recently set up PMS or renewed their focus on it," said Ashish Shanker, head, private wealth investment Advisory, Motilal Oswal Wealth Management. "In the past, several fund houses that launched PMS scaled it down later owing to the lack of focus. So, investors need to be more discerning and do their due diligence on the track record of the institution as well the fund manager."