Portfolio managers not to get fee till losses made up

Norms applicable to all new client agreements from November.

In an attempt to bring transparency in charges of portfolio management schemes (PMS), the Securities and Exchange Board of India (Sebi) has decided that portfolio managers can charge profit-sharing or performance fees only if all the losses have been recovered after the scheme value goes down.

“Henceforth, profit/performance shall be computed on the basis of the high-water mark principle over the life of the investment for charging of performance/profit sharing fee,” the market regulator said in a circular issued on Tuesday.

The norms will be applicable to all new client agreements with effect from November 1. For existing clients, the revised terms will be implemented by January 1, 2011.

Sebi says the high-water mark will be the highest value the portfolio or the account has reached. The portfolio’s value for computing the mark will be taken to be that on the date the performance fee is charged. The frequency will not be less than quarterly. The manager will charge a performance-based fee only on increase in portfolio value in excess of the previously-achieved high-water mark, says Sebi.

Further, all charges shall be levied on the actual amount of clients’ assets under management and the high-water mark shall be applicable for discretionary and non-discretionary services, not for advisory services. In case of interim contributions or withdrawals by clients, performance fees may be charged after appropriately adjusting the high-water mark on a proportionate basis, says the circular.

Sebi’s move is the result of a consultative paper put out in July. The paper had said that profit-sharing or performance-related fees would be on the basis of the high-water mark principle over the life of the investment. Usually, profit-sharing or performance-related fees in PMS are charged by portfolio managers on exceeding a hurdle rate, specified in the agreement. This is the annualised rate of return below which the profit sharing is not applicable.

Sebi said the measure had been taken after complaints from clients on fees and charges levied by portfolio managers.