Actress singer Suchitra Krishnamurthi took the Hong Kong and Shanghai Banking Corproration (HSBC) to court recently, accusing it of having cheated her. Krishnamurthi reportedly entrusted Rs 3.4 crore to HSBC’s portfolio management service (PMS) in 2006 for a promised return of 24 per cent per annum, only to see her capital erode by Rs 80 lakh over a period of five years. She has now sued the bank for damages worth Rs 5 crore.

While the case runs its course in the courts, the incident has sparked a closer scrutiny of PMS, a service similar to that provided by mutual funds (MFs) but meant for high networth individuals (HNIs). Quite simply, a PMS manages your money for you. A PMS has a higher minimum investment than an MF, different processes and fee structures, and is executed through a discretionary or non-discretionary mandate on behalf of the client. While MFs are industry rated and are more transparent, portfolio management services are not rated.

Criticism of a PMS has mainly revolved around the high churning — buying or selling of stocks — of a portfolio which results in repeated brokerage charges (2 per cent by HSBC for Krishnamoorthi) and high transaction fees to the banker. The brokerage arm is sometimes an affiliate of the bank itself. Blank forms signed by clients for the discretionary mandate has also provoked controversy.

So, should people be concerned about what portfolio managers are up to?

“Suchitra Krishnamoorthi’s case is not really one of PMS. From what I have gathered, HSBC did not sign a PMS mandate. It was spread across all kinds of things such as home loan, mutual funds, insurance and so on,” says Ashish Kehair, executive vice-president and head of private wealth management, ICICI Securities.

For investments such as home loans and mutual funds, a client has to go through a lot of paperwork and documentation which ensures that a he or she is kept informed at all stages, he contends.

“So I have a different view about this issue. When you invest in a PMS you are taking an equity risk over a longer time horizon. In the corresponding period (since 2007, when Krishnamurthi invested her money), the Sensex or Nifty fell too,” says Kehair, suggesting that the equity losses a client such as Krishnamurthi bore were in line with what happened in the stock market.

An investor in PMS should instead educate oneself about what the product is and read the fine print, Kehair argues.

To begin with, one must be clear about who should route their funds via a PMS. “Portfolio management services are essentially meant for high networth and ultra high networth individuals,” says Kehair.

High networth individuals (HNIs) are typically defined as having a $1 million of investible assets. Market regulator SEBI (Securities and Exchange Board of India) earlier this year increased the threshold limit for investors in a PMS from Rs 5 lakh (set in 1993) to Rs 25 lakh.

The decision to hike the minimum amount was to discourage retail investors from participating in such investment options. “This does not mean that if you have Rs 25 lakh you put all of that in a PMS. It means that the Rs 25 lakh is a fraction of your total surplus funds,” says Kehair.

ICICI Securities has a minimum ticket size of Rs 5 crore for its PMS clients. “Those who have less than Rs 5 crore should be in mutual funds or bonds, etc,” advises Kehair.

Experts believe that PMS schemes should be entered into with a clear goal or mandate in mind. A PMS is a separate SEBI-licensed entity, whose provisions stipulate that when joining a PMS, the client has to agree on a particular mandate, be it debt, equity, the size of the fund and so on.

“Portfolio management schemes should be long term but they don’t function that way in today’s market. After 2007, markets are not heading anywhere and there is some amount of desperation,” believes Govind Pathak, financial planner, Acorn Investments Advisory Services.

Distrust comes into play when clients find their capital has eroded. It is not just the market performance to blame here. In the singer’s case, she alleged that a chunk of her money was spent by HSBC on high fees, commissions and brokerages.

Kehair concedes that the churning of a portfolio to earn fees is wrong. In a PMS, each transaction bears a fee and can range from 1-2 per cent in some cases.

Some banks have their own brokerage arms and “this is the way they make money for the bank,” warns a former relationship manager for HNIs with a foreign bank, speaking on condition of anonymity.

Kehair, however, points out that in a PMS, fees are “typically stated upfront” as SEBI has stipulated that in a PMS the client handwrites the fees that he is paying, and affixes his signature on each page of the contract. “In our PMS transactions, we do not charge the client. We outsource our broking. As our advisory fee depends on the performance of the portfolio we try to minimise brokerage,” Kehair explains.

“Churning and high cost structures are typical of multinational banks,” says the former relationship manager. If a bank charges 2 per cent every time a client invests, with just three transactions already 6 per cent of your money is gone. So your portfolio will always underperform,” he contends.

A client should, therefore, look for transparent cost structures. Kehair says his company states both fee and profit sharing details in the agreement. SEBI disallows broking charges from being mentioned in the agreement.

Says Pathak, “As a client I want to know the brokerage charges and frequency of transactions. I would also go for a non-discretionary mandate. A declaration should be mandatory to limit exposure,” he adds.

“Ideally, one should also insist that apart from a relationship manager’s updates, one be given online options to track performance and statements,” Kehair avers.

Yet for all that, there is considerable concern over the way PMS is conducted. RTI activist and columnist Krishnaraj Rao who has blogged about the activities of wealth and portfolio managers, expresses concern about the lack of accountability of banks, portfolio managers and regulators. “Banks stonewall most by pleading fiduciary relationship. At the moment clients are an easy hit. Aggrieved clients must file detailed complaints to the regulator,” he says.

He is dismayed that clients too tend to trust their relationship managers blindly. Investors do not take the trouble to go through the documentation. The discretionary mandate also results in power of attorney instruments, a standard form empowering the bank to open and close bank accounts. “The clauses in the forms of some of the banks are absolutely bloodcurdling: I indemnify you against XYZ, in short, giving absolute and total control to the executors,” he says.

Adds Pathak, “As with everything, with PMS too, it’s caveat emptor. Buyer beware.”