How much should you pay for the right portfolio manager?

Hi there,

The rationale for entrusting one’s wealth and savings to a fund manager is simple - Majority of us have zero investment skills. The only ‘safe’ investment that we all know is ‘fixed deposits’. so we nee someone who can create wealth for us- a professional- who’s knows the investment game well.

Now, let’s assume that you’ve found one. Now, how much should you pay for the right fund manager? Are there any regulations for it? How can you make sure that he would perform? Imagine an electrician not doing the work for which he is paid and also causing damage to your electrical equipment.How would you feel?

Here are some guidelines-

Portfolio managers have been asked by SEBI that profits of their schemes be computed only on the ‘high water-mark’ principle. This means the portfolio managers can only charge fee (or share profit) based on the highest value that the portfolio has reached over the life of the investment.

For example, if a portfolio of Rs 10 lakh appreciates to Rs 12 lakh in the first year, a performance fee or profit sharing will be payable on Rs 2 lakh. In the next year if the portfolio value falls to Rs 11 lakh, no performance fee will accrue. If the portfolio value goes up to Rs 13 lakh in the third year, the fee can be charged only on Rs 1 lakh (Rs 13 lakh-Rs 12 lakh). For the fourth year, the ‘high water-mark’ will become Rs 13 lakh.

The regulator has thus ensured that portfolio managers do not charge for loss recovery. However, the ‘high water-mark principle’ will apply only to discretionary and non-discretionary services and not for advisory services.

The market regulator has also prescribed a standardized format of declaring fees and charge. Providers of portfolio management services are now expected to provide details of fees and charges under three scenarios — 20 per cent profit, no profit/no loss and 20 per cent loss — to all clients. This format enables a client to compute the indicative gain or loss on the funds he would be investing for a year.

ASSOCIATED COSTS

Annual management fees and profit sharing:

PMS typically works on a 20/2 thumb rule. You pay 2 per cent annual management fees, on top of which you share 20 per cent of profits you make beyond a “Hurdle Rate”. The Hurdle rate is defined at the outset of your agreement terms and till such time this return is obtained by you, you don’t have to share any profit with the service provider. Until then, you share profits on the basis of “Watermark” concept mentioned above.

Brokerage

Apart from these, you also incur the cost of brokerage for each transaction. Brokerage can vary from 0.25 per cent to 0.50 per cent of transaction value. Many PMS’ also take an upfront fee, which is typically about 2 per cent.

Evaluate cost very carefully. Get a clear understanding of how often stocks will be churned in your portfolio as a high level of churn will mean significant cost on brokerage. This will reduce your overall returns. PMS providers have to mandatorily give at least a six-monthly statement but many of them report more frequently. It’s better to get regular updates so that you can track your returns and take corrective actions if required. Some portfolio managers also provide online access to your portfolio.

Exit clause

And finally, look at the exit clauses. PMS’ may charge a fee if you exit a plan before a certain time period. This will be an important consideration if you think you may need the money in case of exigencies.

PMS BY STOCK BROKING FIRMS

Some of the leading brokerage firms in India are also offering PMS to clients without any lock in terms and conditions. They charge an annual fund management fee, payable quarterly . There is also a minimum investment of 5 or 10 lakhs depending on the broker’s terms and conditions.

Bye for now !!

have nice day !!

You may like these posts:

  1. How to select a Portfolio Manager?
  2. What is a portfolio? What’s portfolio management?
  3. The Broker’s role in investing.

1 Response to “How much should you pay for the right portfolio manager?”

Keisha

September 21, 2011 at 5:28 am

Too many compilmetns too little space, thanks!

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