Direct access facility

Mutual fund investors have long had a choice. In a regular plan they invest through a distributor, and the scheme pays distribution commission out of its expenses. In a direct plan they go straight to the fund house or its registrar; there is no distributor and the expense ratio is lower.

The direct access facility brings the same choice to portfolio management services (PMS). There are no distributors involved in selling the plan: the investor goes to the portfolio manager and puts money in directly, without any intermediary.

The benefit is the same as in a mutual fund: lower cost. Lower expenses mean a lower amount charged to the investor, and a higher net return.

What the rule requires. The PMS has to offer the direct access facility, so that any investor who wants to skip intermediaries can approach the provider directly.

What stays the same. The rest of the process of managing the funds does not differ. The same manager, strategy and portfolio apply; the regular plan simply operates in the traditional way, with its normal expenses including payments to distributors. Performance is not affected by the route; only the cost is.

What does not change either — the PMS rules. A portfolio manager may not accept funds or securities worth less than Rs 50 lakh from a client, and fees still follow the PMS structure of fixed fees and performance-linked fees, with hurdle rate, high water mark and catch-up terms.

The adviser's role, in the workbook's order:

1. Check whether the client needs a PMS at all, compared with other instruments.
2. Once it is clear that a PMS suits the client, consider the suitability of the direct access plan.
3. Where the client understands the nature of the investment, there is often no need to go through an intermediary; the adviser can ask the client to take the direct access facility to save costs.
4. Guide the client on whether a discretionary, non-discretionary or advisory service fits.

This sits naturally with the investment adviser rules: advisers who implement advice may do so only through direct schemes or products.

Illustrative figures — the workbook does not give PMS expense rates.

Mr Kapoor invests Rs 60,00,000 in a discretionary PMS strategy, comfortably above the Rs 50 lakh minimum. Assume the regular route carries total annual charges of 1.25% of the portfolio because it includes distributor payments, and the direct access route 1.0%.

The portfolio itself — the stocks bought, the manager, the strategy — is identical under both. The Rs 15,000 is pure cost saving.

The gap compounds. Suppose the portfolio earns 12% a year before charges, so roughly 11.0% net via direct access and 10.75% net via the regular route. After ten years Rs 60 lakh grows to about Rs 1.70 crore via direct access against about Rs 1.67 crore via the regular route — a difference of roughly Rs 3.8 lakh from nothing but the route of entry.

When would an adviser not push direct access? When the client genuinely needs ongoing hand-holding that no one else is providing. The workbook's condition is precise: the direct route is appropriate when the client is aware of the nature of the investment and what it involves.

Chapter 12 (Portfolio Manager), section 12.7 — Direct access facility offered by PMS — with the difference from the regular plan and the role of investment advisers; direct and regular mutual fund plans are in Chapter 11, section 11.10.1. Expect conceptual questions: whether a PMS must offer direct access (yes), what changes under it (cost, not portfolio management), and how it parallels the mutual fund direct plan.

• The PMS has to offer direct access. It is not optional for the provider.
• Only cost changes, through the absence of distributor payments. Management and performance do not.
• Direct access does not lower the Rs 50 lakh minimum investment in a PMS.
• It mirrors the mutual fund direct plan, which also has a lower expense ratio than the regular plan.
• The adviser checks PMS suitability first, then whether the direct route suits the client, then discretionary versus non-discretionary versus advisory.