Types of Portfolio Management Services

SEBI classifies Portfolio Management Services into three distinct categories based on the degree of discretion granted to the portfolio manager. The classification is crucial because it determines who makes investment decisions, how fees are charged, and which compliance obligations apply.

All three types share the common goal of creating a tailored investment portfolio for a client, but they differ in the extent of client involvement. The distributor must clearly communicate the type of PMS to the investor at the KYC stage, as the investor’s risk appetite and desire for control drive the choice.

In the NISM exam, questions often present a scenario and ask you to pick the correct PMS type. Remember to focus on who decides the buy‑sell actions, whether the manager can act without prior client approval, and the fee structure (performance‑based vs. advisory fees).

• Discretionary PMS – manager decides trades autonomously.
• Non‑Discretionary PMS – client approves each trade.
• Advisory PMS – manager provides advice, client executes.

In a Discretionary PMS, the portfolio manager has full authority to buy, sell, or hold securities on behalf of the client without seeking prior consent for each transaction. This authority is granted through a written agreement that specifies the investment mandate, risk limits and reporting frequency.

Fees for discretionary PMS are typically a combination of a fixed asset‑under‑management (AUM) charge and a performance fee that aligns the manager’s incentives with the client’s returns. Because the manager acts independently, SEBI requires periodic statements, risk‑profile disclosures and a clear audit trail of all transactions.

Exam tip: If a question mentions “manager can trade without client’s prior approval” or “performance‑based fee structure,” the correct answer is Discretionary PMS. A common trap is to confuse this with Advisory PMS, which does not allow execution of trades by the manager.

Non‑Discretionary PMS retains the client’s ultimate decision‑making power. The portfolio manager analyses markets, recommends securities, and prepares an order, but the client must approve each trade before it is executed.

This type often appeals to sophisticated investors who want professional guidance yet wish to retain control. The fee model is usually a flat advisory charge expressed as a percentage of AUM, and there is no performance fee because the manager does not execute trades.

For the exam, look for statements such as “client must sign off on every transaction” or “no performance‑based compensation.” Those cues point to Non‑Discretionary PMS. Remember that SEBI still mandates periodic performance reports and risk‑profile alignment, even though the manager does not trade autonomously.

Advisory PMS, also called Portfolio Management Advisory Services, is a consultative arrangement. The manager provides investment advice, research reports and strategic recommendations, but the client (or a broker) executes the trades independently.

The advisory fee is generally a fixed percentage of AUM, similar to Non‑Discretionary PMS, but there is no performance‑linked component because the manager does not control execution. SEBI treats Advisory PMS as a “service” rather than a “managed portfolio,” so the compliance checklist focuses on disclosure of conflicts of interest and suitability assessments.

Exam questions may phrase this as “manager suggests securities and client places orders on their own.” Recognising the absence of execution authority is the decisive factor for selecting Advisory PMS.

SEBI (Portfolio Managers) Regulations, 2020, prescribe distinct compliance requirements. Discretionary PMS must maintain a detailed transaction register, obtain client consent for the discretionary mandate, and disclose performance fees in the agreement.

Non‑Discretionary PMS still requires a written agreement but focuses on suitability assessment and periodic performance reporting. Since the client signs each trade, the manager’s liability for execution errors is limited.

Advisory PMS is regulated under SEBI (Investment Advisers) Regulations, 2013, with emphasis on conflict‑of‑interest disclosures, fee transparency, and a clear advisory disclaimer. No execution authority means fewer transaction‑level reporting obligations.

1. Confusing fee structures – assuming performance fees exist in Advisory PMS. Remember, only Discretionary PMS can charge performance‑linked fees.

2. Ignoring the execution clause – a scenario that says “client places orders” points to Advisory, not Discretionary.

3. Overlooking regulatory language – SEBI’s use of the term “discretionary mandate” is a clear indicator of Discretionary PMS.

4. Misreading the client‑control question – if the client retains final approval, the service is Non‑Discretionary, even if the manager provides advice.