SEBI proposes to ban upfront commission to distributors of PMS and asked PMS managers instead to move to all trail model. In addition, the market regulator has proposed to increase the threshold limit to invest in PMS from Rs.25 lakh to Rs.50 lakh and capital adequacy or net worth from Rs.2 crore to Rs.5 crore.
We spoke a few industry experts to understand impact of these proposals.
DP Singh, ED and CMO, SBI AMC believes that the move would reduce mis-selling in PMS. “People who started distributing PMS in lieu of mutual fund for better compensation would be affected. There will be short term pain for long term gain. So while, it will affect their revenues in the short term, patience will be rewarded. It also sends out a message that distributors should revisit their business model. In my view, all trail is the way forward for the financial distribution industry. It is a win-win for all stakeholders.”
Anupam Guha, Head of Private Wealth Management and Equity Advisory Group, ICICI Securities believes that ban on upfront commission and the move to all-trail model are welcome measures for the industry as it will encourage long-term focus among distributors. “I strongly believe that whatever is good for investors is good for the industry.”
Guha pointed out that the PMS industry will have a framework if the proposals go through. “So far, PMS doesn’t have a framework. However, SEBI’s move would ensure that the PMS would put better systems and processes in place. Another positive is increase in threshold limit to invest in PMS to Rs.50 lakh. This is in line with the rising income level of individuals.”
Vinod Jain of Jain Investments feels that the move would affect large distributors and distributors who started PMS distributors to compensate for decline in commission of mutual funds. “Large distribution firms, national distributors and distributors who started selling PMS after SEBI rationalized TER will be affected due to reduced income. In fact, just as mutual funds, we may see a slowdown in PMS sales for the initial few days. Also, the Rs.50 lakh threshold would affect the industry.”
He, however, feels that the move would ensure long-term growth of the industry. “Price driven sales practices encourage mis-selling. However, products sold on merit and performance help investors, distributors and manufacturers to grow together. The trail model will ensure this happens.”
Seconding his views, Amit Bivalkar of Sapient Wealth said that this is much anticipated move. “Market have already factored in this change. Going forward, SEBI will implement all trail model in AIFs too. This would bring uniformity across SEBI regulated market linked products. The best part is that only mutual fund distributors are allowed to distribute PMS until NISM develops a course for PMS. Currently, anyone could distribute PMS. I have seen people who do not have expertise in investment advice selling PMS to their clients.”
While the upfront commission ban and shift to all trail would help emerging PMS managers to compete with their larger counterparts, the capital adequacy of Rs.5 crore would be a major roadblock for them to enter into this business. “Many mutual fund managers start their own PMS. These fund managers would now find it difficult to maintain capital adequacy of Rs.5 crore,” said Aditya Vikram Kanoria, Co-Founder & Director, Credent Asset Management.
Kanoria further said that Rs.50 lakh threshold would further affect the industry’s growth. “Wealthy investors would prefer investing in AIFs where minimum ticket size Rs.1 crore. In AIFs, investors can commit Rs.1 crore but invest in tranches. It becomes easier for them to divide their investible corpus in 4-5 parts. However, they may not be comfortable committing Rs.50 lakh in one go.”
