What is a Portfolio Management Scheme?

This content has been reviewed and edited by an Investment Advisor Representative working for Global Predictions, an SEC-registered Investment Advisor.

If you've heard of Portfolio Management Schemes (PMS) and wondered how they work, know that they are a personalized option commonly offered in countries like India, the United Kingdom, and Singapore. In the United States, available alternatives differ, with options like separately managed accounts (SMAs) and wealth management services providing a similar personalized approach but with significant differences in terms of regulation, accessibility, and investor protection.

Key Takeaways

• PMS is popular in markets like India and the UK, offering personalized management for local investors. In the U.S., SMAs and wealth management serve a similar role with added flexibility and regulatory oversight.
• Compliance and Investor Protection: In the U.S., the SEC requires strict transparency for SMAs and wealth management services, providing enhanced investor protection compared to PMS in some emerging markets.
• Diversification and Flexibility: In the U.S., SMAs include a diverse range of global assets, allowing investors both diversification and control over investment decisions.
• Technological Accessibility: In the U.S., robo-advisors and digital platforms have democratized access to SMAs, making them accessible to investors with varied financial profiles.

What is a Portfolio Management Scheme (PMS)?

A Portfolio Management Scheme (PMS) is a personalized investment service managed by professionals for individual clients. Predominantly available in markets like India and the UK, PMS provides high-net-worth investors with an actively managed portfolio tailored to their risk tolerance and financial goals  . Unlike mutual funds, where investor assets are pooled, PMS allows each client to maintain individual ownership of the assets within their portfolio, with a professional manager who makes investments and manages the asset portfolio on behalf of their clients.

How PMS Compares to U.S. Services

While PMS is a personalized structure offered in international markets, in the U.S., separately managed accounts (SMAs) and wealth management services provide a similar level of customization but with additional advantages. In SMAs, as in PMS, a specialized manager creates and adjusts the investment strategy for each client, taking into account their risk profile and financial goals. However, SMAs generally offer greater flexibility in asset choice and the potential to incorporate a wider range of global assets.

Compliance and Investor Protection

In the United States, wealth management and SMA services are designed to meet the SEC's (Securities and Exchange Commission) rigorous regulatory standards, providing an additional layer of security for investors. SMAs include compliance requirements such as filing Form ADV, which details all fees and management practices, ensuring transparency. In emerging markets where PMS is popular, regulations may be less stringent, potentially offering lower levels of investor protection.

Benefits and Limitations of Diversification in PMS

Although PMS offers customization, international diversification may be limited due to local regulations and a focus on domestic assets. In the U.S., SMAs allow for broader diversification, including access to international assets, providing a level of breadth that PMS generally does not reach. In some developed markets, there may be limited allocation to international assets, but the global reach of SMAs remains superior.

Types of PMS and Application Examples

There are three main types of PMS:

• Discretionary PMS: The manager takes full control over investment decisions. Example: An investor with a high-risk tolerance might choose discretionary PMS, allowing the manager to explore opportunities without needing prior approval.
• Non-Discretionary PMS: The manager recommends investments, but the client maintains final control. Example: An investor who prefers closely monitoring their decisions might find this option more aligned with their profile.
• Advisory PMS: The manager offers advice on strategies, but the client is responsible for executing the trades. Example: An experienced investor seeking only guidance for their own transactions.

Concrete Examples of SMA and PMS Adaptation

While PMS is more focused on domestic assets due to local regulations, U.S. SMAs allow for greater international diversification. For instance, an investor interested in emerging markets might prefer SMAs, which enable the purchase of global ETFs or specific assets providing exposure to these markets, something that PMS generally does not cover.

Digital Tools and Accessibility in PMS and SMAs

In the U.S., access to SMAs has expanded through digital platforms and robo-advisors, democratizing access to these services. Although the use of technology in PMS is still more limited, some markets are beginning to integrate digital platforms to improve access to PMS services. This development is in its early stages and on a smaller scale than in U.S.-based SMAs.

FAQ

1. What is the difference between PMS and SMA?

PMS, common in markets like India and the UK, offers personalization but typically requires high minimum investments and may have lower regulatory transparency. U.S. SMAs also provide customization, with the added benefit of greater asset flexibility and rigorous oversight by the SEC.

2. Why isn’t PMS offered in the U.S.?

In the U.S., the regulatory framework favors SMAs and wealth management services that align with SEC standards for transparency and investor protection. PMS is more prevalent in markets with different regulations, such as India and Singapore.

3. How do digital platforms make SMAs accessible?

In the U.S., robo-advisors and digital advisors help reduce costs and allow investors with various financial profiles to access SMA services, providing personalized management at a lower cost.

4. What should I consider before opting for an international PMS?

U.S. investors should assess costs, transparency, and access limitations of a PMS in another country. Alternatives like U.S.-based SMAs can offer similar benefits with greater regulatory security and more asset options.

5. Do SMAs and U.S. wealth management services allow access to global assets?

Yes. SMAs and U.S. wealth management services frequently include a variety of international assets, enabling diversification without the need for an offshore PMS.