Discretionary vs. Non-Discretionary vs. Advisory PMS for HNIs

In today’s intricate financial landscape, High Net Worth Individuals (HNIs) are increasingly seeking sophisticated investment solutions to optimise their wealth creation and management. Among these, Portfolio Management Services (PMS) stand out as a highly personalised and professionally managed avenue. 

This comprehensive guide will demystify the various types of Portfolio Management Services—Discretionary, Non-Discretionary, and Advisory—helping you understand their nuances and determine which model best aligns with your unique financial goals, risk appetite, and desired level of involvement.

While both PMS and mutual funds involve professional management, PMS caters to a niche segment of clients, typically requiring a minimum investment of ₹50 lakhs as per SEBI regulations. This higher threshold ensures a focus on high-quality, personalised services for HNIs. For a more detailed understanding of portfolio management service, you can visit our blog covering here.

The Securities and Exchange Board of India (SEBI) classifies PMS into three primary categories based on the degree of control and investor involvement:

In Discretionary PMS, the portfolio manager is granted full authority and autonomy to make all investment decisions on your behalf, without requiring your explicit approval for each transaction. This includes buying and selling securities, selecting asset allocation, rebalancing the portfolio, and managing trade timings. Further, the portfolio manager handles all operational activities related to trade settlement, banking as well as provides performance reports and tax reports. The term “discretionary” signifies that investment decisions are made at the portfolio manager’s discretion.

• Key Features: The portfolio manager operates independently, actively monitoring market conditions, economic trends, and individual securities to make timely adjustments. Your portfolio strategy is customised to your goals, risk tolerance, and timeline. 
• Who Should Opt for DPM?: This service is ideal for HNIs who prefer a hands-off approach to their investments, trusting professional expertise to navigate the markets. It’s particularly valuable for individuals who lack the time, expertise, or inclination to actively manage their portfolios. 
• Benefits: 

○ Time-Saving & Convenient: It frees you from the burden of day-to-day monitoring of your portfolio and investment decision-making, allowing you to focus on other priorities. 

○ Professional Expertise & Experience: You leverage the knowledge and skills of seasoned portfolio managers who conduct in-depth research and implement sophisticated strategies and who track market movements on a daily basis. 

○ Swift Decision-Making: Managers can act promptly on market opportunities or mitigate risks without waiting for client approval, potentially enhancing returns, especially in volatile markets. 

• Considerations: 

○ Limited Client Control: You have minimal direct say in individual investment decisions. 

○ Trust in Manager: Returns depend heavily on the manager’s competence and your complete trust in their skills.

In Non-Discretionary PMS, the portfolio manager provides investment recommendations and advice, but the final decision to execute these recommendations rests with you, the investor. No changes to the portfolio are implemented without your explicit approval. The manager is responsible for executing trades based on your instructions. 

• Key Features: This model involves a collaborative partnership where you actively participate in the decision-making process. The manager offers suggestions, but you retain the authority to approve or reject them. 
• Who Should Opt for NDPM?: This type is suitable for HNIs who desire a degree of control over their portfolios and wish to be actively involved in management. It’s for those with market knowledge and the time to evaluate recommendations. This is also useful for those investors who know how to invest but want someone else to do all the back office work such as placing orders, making payments, taking delivery and tracking portfolio performance.
• Benefits: 

○ Greater Client Control: You retain control over investment decisions, aligning your portfolio with your preferences. 

○ Full Awareness: You have full awareness of all transactions. 

○ Potentially Lower Fees: Fees may be lower compared to Discretionary PMS. ○ Outsourcing of back office activities 

• Considerations: 

○ Requires Active Participation: It demands active participation and timely responses from the investor along with a fair degree of understanding of 

investing and markets. 

○ Missed Opportunities: Delays in approval can lead to missed market 

opportunities or higher costs. 

Advisory PMS grants investors the highest level of control over their portfolios. In this model, the portfolio manager’s role is strictly limited to providing investment advice and recommendations. You, the investor, hold complete responsibility for accepting and executing these recommendations, as well as handling all back office and administrative responsibilities. 

• Key Features: The manager offers guidance and advice, but all decision-making and execution are in your hands. You need to possess the knowledge and capability to analyze recommendations and execute trades independently. 
• Who Should Opt for Advisory PMS?: This type is tailored for highly sophisticated HNIs who are well-versed in investment strategies and have the capacity to analyse, evaluate, and execute investment decisions independently. It’s not recommended for individuals with limited investment knowledge. 
• Benefits: 

○ Maximum Client Control: You retain full control over portfolio decisions and execution. 

○ Potentially Lower Fees: Fees are comparatively lower since the manager isn’t handling execution. 

• Considerations: 

○ Significant Time Commitment: It demands considerable time and effort to analyse advice, make decisions, and execute trades. 

○ Requires Expertise: You are accountable for trade execution, compliance, and record-keeping, with a higher chance of mistakes without professional handling.

Selecting the appropriate PMS depends on various factors unique to your financial situation and preferences. Consider the following questions to guide your decision: 

• What level of control do you want over your portfolio? If you prefer a hands-off approach, trusting experts to manage your wealth, Discretionary PMS is ideal. If you wish to approve every transaction, Non-Discretionary PMS offers a balanced approach. For complete autonomy, Advisory PMS is your choice. 
• How much time can you dedicate? Discretionary PMS requires the least time commitment, while Advisory PMS demands significant time and effort for analysis and execution. 
• How well do you understand market dynamics? If you have limited market understanding, Discretionary PMS is suitable. For those with decent knowledge, Non-Discretionary PMS allows for involvement. Advisory PMS is only for highly sophisticated investors. 
• Assess your risk tolerance and investment goals: It’s crucial to align your PMS choice with your risk appetite and long-term financial objectives, whether it’s wealth creation, income generation, or tax saving.
• Understand Tax Implications: PMS investments are subject to capital gains tax. Long-term capital gains on equity investments held over one year are taxed at 12.5% (above ₹1.25 lakh), while short-term gains are taxed at 20%. Income from Debt investments are added to your income and taxed accordingly.

At EquiZen, we are committed to providing bespoke wealth management solutions that resonate with the sophisticated needs of HNIs. Our approach combines: 

• Proven Track Record: Our experienced team employs cutting-edge analytics and deep market insights to craft strategies designed to outperform the market while effectively managing risk. We have also designed a framework to evaluate the more than 400 PMS managers in the market. 
• Exclusive Investment Opportunities: Gain access to unique investment avenues tailored to your wealth growth objectives. 
• Personalised Service and Support: Our dedicated team provides one-on-one guidance, ensuring your financial journey is seamless and aligned with your aspirations.

The choice between Discretionary, Non-Discretionary, and Advisory PMS is a personal one, deeply dependent on your individual financial goals, risk appetite, and desired level of involvement in your investment decisions. Each type offers distinct advantages, catering to different investor profiles.