Portfolio Management Service is an investment product that allows investors to build a highly customised and diversified portfolio according to their financial goals, risk tolerance, and investment preferences. Investors can choose from three types of portfolio management services – discretionary PMS, non discretionary PMS, and advisory PMS. While they all give investors the benefit of professional management and customised investment strategies, they differ in the level of control and involvement required from the investor.
Let’s understand PMS in more detail and look at how its types differ from one another.
What is Portfolio Management Services (PMS)?
Investment firms and licensed managers provide services called Portfolio Management Services (PMS), which are designed to manage and grow an individual’s wealth by investing in a basket of financial instruments like stocks, bonds, mutual funds, gold, and more. You might wonder if this concept sounds similar to how a mutual fund works. After all, both involve a professional manager investing in a diversified portfolio on your behalf. While they share this one concept, they are entirely different approaches due to the level of customisation and control PMS offers.
When you sign up for a portfolio management service, the provider thoroughly assesses your financial goals, risk profile, and investment preferences. Based on these factors and the overall market conditions, the PMS provider builds a diversified portfolio of securities customised specifically to your unique needs. The Securities and Exchange Board of India regulates the PMS industry, which makes it quite safe and flexible for investors.
Investors need at least Rs. 50 lakh to avail portfolio management services, so they are aimed at mostly high net worth individuals and institutional investors. The high ticket size helps make sure that PMS providers can focus on delivering high-quality services to a smaller section of investors.
Since the aim of PMS is generally to generate higher returns, these services can see managers adopting more aggressive investment strategies, which can carry higher levels of risk compared to traditional investment options. The high minimum investment amount thus also ensures that only investors with a higher risk tolerance and long-term financial commitment can participate.
There are broadly three types of portfolio management services:
- Discretionary Portfolio Management Services
- Non-Discretionary Portfolio Management Services
- Advisory Portfolio Management Services
These three types of PMS give investors different levels of control over their investments. Let’s have an in-depth look at them.
What is Discretionary PMS?
In this type of portfolio management service, the client gives the portfolio manager full freedom to make investment decisions on their behalf. These decisions include buying and selling securities, selecting the appropriate asset allocation, rebalancing the portfolio, and managing the timing of trades and transactions. Simply put, the portfolio manager is given full ‘discretion’ over the above actions and does not need to consult the client before every decision.
The manager of the Discretionary PMS makes these decisions based on not only the investor’s goals, risk appetite, and preferences, but also according to any previous strategy-related agreement the client has with the portfolio manager. This service is usually opted by investors who lack the expertise or the time needed to track and manage complex investments.
What is Non-Discretionary PMS?
Just as the name suggests, the provider of a Non Discretionary PMS does not have full authority over their client’s portfolio. In such services, the portfolio manager acts more like a consultant and offers personalised investment advice so that the clients can make the decision that they feel is right.
However, that’s not the only job of the portfolio manager offering this service. Managers are still responsible for executing the trades based on the investor’s instructions. After the investor has made their decision regarding security, asset allocation, and timing, or approved the manager’s recommendations, the portfolio manager carries out the wishes accordingly. Ultimately all decisions require the investor’s explicit approval before any action is taken.
While non-discretionary portfolio management services also help investors save some time, they require more time and expertise compared to discretionary PMS as they must actively participate in decision-making and monitor their portfolio regularly.
These types of services are generally opted by investors who are not willing to immediately hand over the full control of their investments, often because they do not fully know the portfolio manager. Once trust is established the investors can shift from a non-discretionary portfolio management service to a discretionary one.
What is Advisory PMS?
Advisory PMS grants investors the highest level of control over their portfolios. In an Advisory PMS, the role of the manager is limited to just providing their clients with personalised investment advice. It depends on the investor whether or not they act on these recommendations and they fully retain the responsibility and authority to make the final calls.
Since a provider of advisory services lacks any control over the portfolio, the execution of trades and other activities lies completely in the hands of the investors. This high level of control makes advisory PMS suitable for experienced investors who can dedicate the time needed to analyse recommendations and make professionally backed decisions.
Comparison Table: Discretionary vs Non-Discretionary vs Advisory PMS
Summarised below is the difference between Discretionary PMS, Non Discretionary PMS, and Advisory PMS:
| Factor | Discretionary PMS | Non-Discretionary PMS | Advisory PMS |
| Who makes the decisions? | The manager makes all portfolio related decisions like what to buy and sell, when to trade, when to rebalance the portfolio, etc. | The portfolio manager makes recommendations, however, they cannot execute anything without approval from the investor. | The investor makes all decisions in an advisory PMS. |
| How involved are the investors? | Investors have minimal involvement. | The investors have to approve every action, so they are moderately involved. | Since investors retain full control over their portfolios, they are highly involved. |
| Who is it suitable for? | Investors with limited finance knowledge or time constraints will find discretionary PMS most suitable. | Investors who want to have some control over their portfolio. Investors should ideally also have decent market experience and should be able to dedicate some time to research the manager’s recommendations. | Investors with significant knowledge of market dynamics who can dedicate their time to research recommendations, execute trades, and monitor their portfolios may find advisory PMS appropriate. |
| What is the manager’s role? | Managers have full control over the portfolio, so they make decisions on their own, based on the investor’s financial goals, risk tolerance, and investment preferences. | Portfolio managers offer recommendations and execute trades as per the investor’s wishes. | Managers only offer advice. |
| Can investors recommend changes? | No, full control lies in the hands of the manager. | Yes, investors can make suggestions. | Not applicable, as investors have full control. |
| Who has the execution responsibility? | The portfolio manager is responsible for the execution of all trades, rebalancing, asset allocation, and other activities. | The portfolio manager has the responsibility to execute whatever the investor wishes. | The investor is responsible for all portfolio executions. |
How to Choose the Right PMS for You?
To understand which type of PMS would be more suitable, you should consider the following questions:
1. What level of control do you want over your portfolio?
Advisory PMS allows investors to have complete control over their portfolios. Non-discretionary PMS is more balanced, with the portfolio manager offering recommendations and the investor retaining the authority to approve or reject decisions. Finally, discretionary PMS gives full control to the portfolio manager, who makes and executes investment decisions on behalf of the client. If you’re looking for a more hands off approach, discretionary PMS would be more suitable. However, for those looking to retain some control over their portfolios, advisory or non-discretionary PMS might be the better option.
2. How much time can you dedicate?
In increasing order of time commitment, discretionary PMS requires the least involvement, as the portfolio manager makes and executes all investment decisions. Non-discretionary PMS can also save you some valuable time researching individual securities and executing trades, however, it still demands some level of involvement, as you need to review and approve the portfolio manager’s recommendations. Advisory PMS easily requires the most time and effort, as you’ll need to analyse the manager’s advice, make investment decisions, and execute trades yourself.
3. How well do you understand market dynamics?
If you have a limited understanding of how the market works or can’t keep up with its constant updates, discretionary PMS is the clear choice because the portfolio manager handles all investment decisions and execution for you. Similarly, if you have a decent understanding, non-discretionary PMS will allow you to stay involved with your portfolio. Advisory PMS should only be considered by those investors who have a strong understanding of market dynamics and the ability to analyse the manager’s advice.
Either way, before choosing a portfolio management service, remember to assess your financial goals and risk tolerance. PMS can be used to achieve a variety of goals including wealth creation, income generation, and even saving taxes. Your risk tolerance is also an important factor as generally investors with a higher tolerance opt for discretionary PMS. Make sure the PMS provider or firm is well-reputed, licensed by SEBI, and has a proven track record.
Pros and Cons of Each PMS Type
While all types of PMS share advantages like professional management and personalised investment strategies, there are some advantages that are specific to each type.
Have a look at the pros and cons of Discretionary PMS, Non Discretionary PMS, and Advisory PMS.
1. Pros and Cons of Discretionary PMS
Pros:
- Helps investors save valuable time as they don’t need to research and analyse different securities, determine asset allocation, execute trades, monitor portfolios, and more.
- Allows the portfolio manager to act promptly, which means they can quickly react to any market changes. For example, if a particular stock experiences a sudden drop due to market conditions, the manager can immediately sell it to minimise losses without waiting for the client to approve it.
Cons:
- Takes away the client’s control over the portfolio.
- Requires clients to have complete trust in the portfolio manager’s skills.
- Fees may be higher compared to other types of portfolio management services.
2. Pros and Cons of Non-Discretionary PMS
Pros:
- Allows investors to have a degree of control over their portfolios.
- Fee may be lower compared to discretionary PMS.
Cons:
- From trades to rebalancing, investors need to approve everything that happens in the portfolio. This can be time consuming and requires investors to have moderate financial knowledge.
- Slow approvals can lead to missed opportunities. For example, if there is an opportunity to invest in an undervalued stock, the manager cannot purchase it without the investor explicitly approving the trade. A slow approval can potentially lower the returns.
3. Pros and Cons of Advisory PMS
Pros:
- Investors retain full control over portfolio decisions.
- Comparatively lower fees.
Cons:
- Requires investors to have considerable finance experience.
- Demands significant time.
Conclusion
PMS stands for Portfolio Management Services, which are services where professional managers handle the portfolios of high-net-worth individuals to help them make better investment decisions. Managers assess the investors’ financial goals, risk tolerance, and investment preferences and offer personalised investment strategies. Based on the level of control investors can retain on their portfolios, there are three types of PMS – Discretionary PMS, Non Discretionary PMS, and Advisory PMS.
In a discretionary PMS, the investor gives the manager full authority to manage the portfolio on their behalf without any approval. Non-discretionary PMS allows the investor to have some control over their portfolio and the manager only gives recommendations and executes. Advisory PMS gives investors the highest level of control, as the manager only offers personalised advice, leaving the rest of the responsibility entirely in the hands of the investor.
