Registered advisors, distributors assess Sebi's MF-only PMS route

They see multiple advantages - from performance visibility to client stickiness

Mutual fund (MF) distributors and registered investment advisers (RIAs) are assessing the Securities and Exchange Board of India’s (Sebi’s) newly approved MF-only portfolio management services (PMS) model. They are awaiting the final regulations for greater clarity on the framework.

 

Sebi on Thursday approved the Portfolio Managers Route for Investing in Mutual Fund Units (PRIM), which will allow PMS players to invest clients’ funds in direct mutual fund schemes and specialised investment funds (SIFs).

 

With a minimum ticket size of ₹25 lakh, the new framework could open up a new business model for those engaged in MF distribution or advisory. This could be either as distributors, RIAs or research analysts (RAs), said experts.

 

In recent years, multiple players, including the likes of Dezerv and Capitalmind, along with newer entrants such as PrimeInvestor, have already been using the PMS structure to create and manage portfolios of MF schemes for clients. 

 

The dedicated framework could make the model more attractive by lowering the entry barriers around ticket size, net worth and other regulatory requirements. This would potentially draw greater interest from existing PMS players as well as RIAs, RAs and large MF distributors.

 

The model is especially lucrative for RIAs, said experts, given the scope for performance visibility and chances of higher customer stickiness.

 

“On the face of it, the model makes sense for a RIA for a few reasons. First, it reduces the compliance and net worth requirements, while the ₹25-lakh ticket size widens the addressable market. More importantly, it gives us a way to showcase our actual performance,” said Rahul Jain, senior vice-president of research at International Money Matters.

 

Unlike the RIA structure, PMS provides greater discretion in terms of portfolio management, while also creating scope for building and publishing of performance track record, he added.

 

Performance is the key metric tracked by investors in the asset and wealth management business and, ultimately, plays a major role in determining who gets more business.

 

“Unlike the advisory model, where clients have to act on the RIA’s recommendations, a PMS structure would allow the manager to execute transactions on the client’s behalf. This could make the relationship more seamless and reduce the risk of clients moving away, particularly for larger RIAs managing sizeable assets,” said Avinash Luthria, RIA at Fiduciaries.in.

 

Srikanth Meenakshi, cofounder of PrimeInvestor, which recently moved from being a research analyst to PMS, said the MF-PMS is also a natural progression for a lot of players involved in MF advisory.

 

Distributors, however, are awaiting greater clarity before deciding whether it merits a shift.

 

“It will really hinge on whether we are allowed to continue with distribution alongside PMS. We have built our distribution business over the years and have significant assets under management (AUM) base. So, giving that up to start a PMS business from scratch would be a major decision. If distribution is not allowed, moving to PMS could mean losing a significant number of clients who may not be comfortable paying a fee or whose portfolios are below the ₹25-lakh minimum threshold,” said a Mumbai-based distributor.