ARTICLE
30 October 2023

Making The Case For Mini-PMS To Fill A Vacuum For Retail Investors

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Finsec Law Advisors

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Shanaya S., a software professional aged 28, is looking to invest Rs. 20 lakhs in the stock market.
India Strategy

Shanaya S., a software professional aged 28, is looking to invest Rs. 20 lakhs in the stock market. She already has active SIPs and is looking to make investments in direct equity and build a portfolio. She is looking for professional advice for managing her investments. Where does she go?

Should she seek consultation with a SEBI registered investment adviser (RIA)?

RIAs are not permitted to hold client securities and funds and their role is limited to providing advisory services. They neither have skin in the game nor do they actively manage the funds and securities but rather provide advice for a fixed fee as and when sought by clients. It is no surprise that only 1314 entities are registered as RIAs in India over the last 10 years.

The reason is simple, very few sophisticated clients pay for the advice rendered and everyone else pays only for performance. Further, clients would be required to handle funds and securities and carry out the transactions themselves. The current regulatory structure does not provide any option for average retail investors like Shanaya to hire Portfolio Managers who can manage her investments because SEBI believes that Portfolio Management Services (PMS) is too risky of a product for her.

SEBI doubled the minimum investment limit for investments through SEBI registered PMS from Rs. 25 lakhs to Rs. 50 lakhs in the year 2020. This step was taken due to the relatively higher risk profile associated with PMS, serving as a deterrent to retail investors with limited understanding of the market.

Since the implementation of the new regulations, it comes as no surprise that Portfolio Managers have lost nearly a fourth of their clients from 2019 to 2022 because of the increase in the minimum investment requirement. Under the current regulatory regime, PMS is tailored to cater only HNIs with a net worth of atleast Rs. 4-5 crores.

This restriction cuts out the retail investors who wish to seek professional management of their investment in the stock market and diversified portfolio. It is not the case of SEBI that retail investors should not invest in direct equity and should only invest through mutual funds. A huge number of retail investors buy direct equity and an even higher number subscribe in IPOs etc. Therefore, it is only advisable that retail investors are provided with more options to invest in the market through SEBI-registered market professionals.

Case for Mini-PMS

The current regulatory framework provides no handholding to a retail investor who wishes to invest smaller amounts, say, Rs. 5 lakhs in direct equity. The only alternative available to retail investors is to engage brokers or investment advisors, whose role in the financial markets are restricted to buying and selling of stocks and providing investment advice as opposed to handholding and day-to-day portfolio management.

In absence of favorable regulatory architecture, retail investors are vulnerable to falling for get-rich-quick schemes and are pushed towards stock tips, unsolicited advice, WhatsApp and telegram channels and eventually fall prey to pump and dump schemes. With the proliferation of "finfluencers", there is no dearth of misinformation in the investment advisory space. SEBI itself has observed numerous instances where influencers have used their online presence to attract retail investors by promising guaranteed returns and giving unsuitable investment advice.

While SEBI plays a critical role as the gatekeeper of financial markets and protector of investors' interests, the importance of a democratized access to sophisticated investment strategies and expertise cannot be overstated. One way to achieve this is to introduce the concept of mini-PMS, enabling retail investors to benefit from professional portfolio management with lower minimum investment requirements.

A mini-PMS would serve as a customized investment service designed to meet the needs of investors who might not have the substantial capital required for a traditional PMS. Reducing the minimum investment threshold from Rs. 50 lakhs to a lower amount such as Rs. 5 lacs would not only allow retail investors to benefit from the expertise of Portfolio Managers, who can assist them in making informed choices, but would also enable them to diversify their portfolios, thereby mitigating the risk associated with concentrated investments.

As the financial industry continues to grow and evolve, there is increasing potential to make the markets and products more inclusive. This not only aligns with SEBI's goal to make the markets more investor-friendly but also significantly reduces risks for small, retail investors. Introducing mini-PMS is also in line with some of SEBI's more recent efforts to push for MSM REITs, execution-only platforms to facilitate transactions in direct plans of mutual funds, OBP for investment in corporate bonds, thereby providing them ease of investment, flexibility and the opportunity to diversify their holdings.

SEBI could impose a separate set of rules for registrations of mini-PMS and ensure greater transparency and accountability for the registered entities. For example, mini-PMS may not be allowed to charge a fixed fee and be allowed to charge only performance-linked fee. This would make mini-PMS more cost-effective, thus incentivizing Portfolio Managers to have a skin-in-the game while making the product more accessible to retail investors.

As India enters the Amritkaal period, the fintech industry has democratized investment opportunities for average Indians and, as the regulator, it is SEBI's duty to develop the securities market to make it more accessible for average Indians. A mini-PMS would provide a much-needed avenue to retail investors to avail professional management of its investment in stock market through a SEBI regulated entity rather than rely on quack finfluencers or their brokers or worse basis, WhatsApp and telegram forwards.

Originally published by Moneycontrol on October 19, 2023 (linked here).

The contents of this article should not be construed as legal opinion. Recipients should take independent legal advice before acting on any views expressed herein. The comments in the article are as of the laws prevalent on the date the article was originally published. The views stated in the article are not binding on any authority or court, and so, no assurance is given that a position contrary to that expressed herein will not be asserted by any regulatory authority/courts. For any further queries or follow up, please contact Finsec Law Advisors.

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