Disclosures to the Prospective Clients

SEBI (Portfolio Managers) Regulations, 2020 obliges a PM to present a clear, concise and truthful disclosure document to every prospective client prior to the execution of a PMS agreement.

The disclosure must be in writing, either printed or electronic, and must be signed by the client acknowledging receipt. This requirement is intended to ensure that investors can make an informed decision based on the PM’s fee structure, risk profile, investment strategy and past performance.

Exam relevance: Questions frequently ask which of the following is NOT a mandatory disclosure, or they present a scenario where a client claims they were not given a particular piece of information. Remember that the regulator’s list is exhaustive – omission leads to penalties and disqualification.

• Reference: SEBI (Portfolio Managers) Regulations, 2020 – Clause 4.2.3.
• Penalty for non‑disclosure can be up to ₹5 lakh or suspension of registration.

The disclosure document must contain the following core elements: the PM’s registration number, the investment strategy, the risk‑profile questionnaire, fee structure, expense ratio, minimum investment amount, lock‑in period, and performance reporting frequency.

Additionally, the PM must disclose any material conflict of interest, the identity of any related parties, and the process for handling client complaints. Each element should be presented in plain language, avoiding jargon that could mislead a lay investor.

From an exam perspective, the list above is often presented in a matrix format. Memorise the eight mandatory items; any item outside this list is optional and will be marked as a distractor.

• Investment strategy – description of asset classes, geographic focus and turnover.
• Risk profile – results of the questionnaire and the matching suitability class.

Before onboarding, the PM must provide a detailed risk‑profile questionnaire and disclose how the client’s answers map to a suitability category (e.g., conservative, moderate, aggressive). This ensures that the recommended portfolio aligns with the client’s risk tolerance and capacity.

The disclosure must also explain the implications of each risk category, such as expected volatility, draw‑down potential and typical return horizon. Failure to disclose this can be deemed a breach of the suitability principle under SEBI regulations.

Exam tip: Questions may ask you to identify the statement that correctly describes the purpose of risk‑profile disclosure. Look for wording that mentions "alignment of investment strategy with client’s risk tolerance".

All fees – management fee, performance fee, transaction costs and any other charges – must be disclosed in absolute rupee terms and as a percentage of assets under management (AUM). The expense ratio, which aggregates these recurring costs, is a key figure that investors compare across PMS providers.

The disclosure should also state the frequency of fee calculation (monthly, quarterly or annually) and the exact method of deduction (e.g., from the client’s account or via a separate invoice). Transparency here reduces the risk of fee‑related disputes.

In the exam, you may be given a fee breakdown and asked to compute the expense ratio. Remember the formula provided in the next block.

Prospective clients must be told how often performance will be reported – typically monthly or quarterly – and the format of the report (NAV statement, returns summary, benchmark comparison). The disclosure must also mention any lag in reporting and the basis of return calculation (e.g., time‑weighted vs money‑weighted).

If the PM uses a benchmark, the benchmark’s name, methodology and historical performance must be disclosed. This allows investors to assess relative performance objectively.

Exam focus: Remember that the frequency of reporting is a mandatory disclosure, whereas the inclusion of a benchmark is optional but often expected. Questions may test this distinction.

The disclosure must be provided before the client signs the PMS agreement and before any funds are transferred. SEBI mandates that the document be given in a durable medium – printed paper, PDF or a secure electronic portal – and that the client’s acknowledgment be recorded.

If the client receives the disclosure electronically, the PM must obtain a digital signature or an email acknowledgment. The timing is critical; a late disclosure can render the agreement voidable and attract regulatory action.

Exam tip: Questions may present a timeline and ask whether the PM complied. Look for the phrase “prior to execution of the agreement” as the decisive factor.

Distributors should maintain a pre‑onboarding checklist: verify the PM’s registration number, confirm that the prospectus includes all eight mandatory disclosures, ensure the expense ratio is calculated correctly, and obtain a signed acknowledgment from the client.

Periodic internal audits should compare the disclosed documents against SEBI’s latest regulations to catch any gaps caused by regulatory updates. Maintaining a digital repository of signed disclosures simplifies audit trails.

In the exam, checklist‑style questions test your ability to sequence compliance steps. Remember the order: (1) Obtain prospectus, (2) Verify mandatory items, (3) Provide to client, (4) Capture acknowledgment, (5) Store securely.