Non-discretionary service
Also written Non-discretionary portfolio management
A portfolio management service in which the client decides every buy and sell and the portfolio manager only executes — the manager must consult the client for every transaction.
In plain language
A portfolio manager can be given the money and the freedom to act, or the money and nothing else.
In a discretionary service the manager decides. He buys and sells as he thinks fit, within the contract, without asking first.
In a non-discretionary service the client decides. What to buy, what to sell, and when — all of it rests with the investor. The manager has to consult the client for every transaction.
So what does the manager actually do? He executes. He runs the trades, keeps the records and manages the portfolio, but only on instructions and with the client's consent.
There is a third arrangement that goes one step further. In an advisory service the manager only suggests ideas; the client both decides and executes. The line between the three is who decides and who places the trade.
How it works
Section 12.2.2 defines it: a non-discretionary portfolio manager manages the funds in accordance with the directions of the client. The manager does not exercise his or her discretion for the buy or sell decisions and has to consult the client for every transaction. Decisions like what to buy or sell, and when to buy or sell, rest with the investor. The execution of trade is done by the portfolio manager. So the portfolio manager provides investment management services with the consent of the client.
The three services, side by side (sections 12.2.1 to 12.2.3):
| Who decides | Who executes | Typical client | |
|---|---|---|---|
| Discretionary | Portfolio manager | Portfolio manager | Clients delegating fully |
| Non-discretionary | Client | Portfolio manager | Clients who want control with support |
| Advisory | Client | Client | Institutional clients who manage their own portfolios but hire country experts |
The regulation says the same thing in the responsibilities. Section 12.5 pairs the two obligations in one sentence: the discretionary portfolio manager shall individually and independently manage the funds of each client in accordance with the needs of the client, in a manner which does not partake the character of a Mutual Fund, whereas the non-discretionary portfolio manager shall manage the funds in accordance with the directions of the client.
Everything else applies equally. Whichever service is chosen, the portfolio manager shall not accept from the client funds or securities worth less than fifty lakh rupees, must act in a fiduciary capacity, must segregate each client's holding in securities in separate accounts, must keep client funds in a separate account with a scheduled commercial bank, may invest a maximum of 30% of a client's portfolio in securities of its own associates or related parties with a one-time written consent, and shall not invest in below investment grade securities.
Section 12.10 notes that the choice itself is advice: the investment adviser has to help the client decide whether they should go in for a discretionary plan or a non-discretionary one or even the advisory service.
A worked example
Illustrative figures. Dr Kamath signs a non-discretionary PMS mandate for Rs 80,00,000 — above the Rs 50 lakh floor that applies to every PMS.
How a week runs:
| Day | Event | Who acts |
|---|---|---|
| Monday | Manager proposes buying Rs 6,00,000 of a cement stock | Manager recommends |
| Tuesday | Dr Kamath approves Rs 4,00,000 only | Client decides |
| Tuesday | Order placed on the exchange, shares credited to his own demat account | Manager executes |
| Thursday | Stock falls 9%; manager wants to cut the position | Manager must call and ask |
| Thursday | Dr Kamath, travelling, does not respond | Nothing happens |
That Thursday is the whole trade-off. In a discretionary mandate the manager would have sold without asking. Here he cannot, and the Rs 4,00,000 position sits through the fall — Rs 36,000 of loss the manager could see coming and had no authority to stop.
In return, Dr Kamath is never surprised. Every rupee moved was a rupee he approved.
If he had chosen an advisory relationship instead, the manager would have sent the cement idea and nothing else: Dr Kamath would have placed the order through his own broker. And whichever of the three he picks, the same rules bind the manager — his Rs 80,00,000 stays in a separate account in his own name, no more than Rs 24,00,000 of it (30%) may go into the manager's associates with his one-time written consent, and none of it into below investment grade securities.
Why NISM asks about it
Chapter 12 (Portfolio Manager), section 12.2.2, with the regulatory pairing in section 12.5 and the adviser's role in helping the client choose in 12.10. Expect a question separating the three services by who takes the decision and who executes — the non-discretionary answer is client decides, manager executes.
Common exam traps
- Non-discretionary is not advisory. In both the client decides, but in a non-discretionary service the manager executes; in an advisory service the client executes.
- The manager must consult for every transaction, not merely report afterwards.
- The Rs 50 lakh minimum applies to every PMS, discretionary or not. There is no lower floor for a non-discretionary mandate.
- The manager is still a fiduciary. Acting only on instructions does not dilute the duty, the segregation of holdings or the 30% associate cap.
- Discretionary managers must not run the portfolio like a mutual fund. The regulation requires each client's funds to be managed individually and independently.
- Do not confuse this with execution only services in the adviser regulations, which is a different relationship under a different rulebook.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Portfolio Management ServicesA tailored investment service where the client owns the securities directly in their own name, regulated under the SEBI (Portfolio Managers) Regulations, with a minimum investment of Rs 50 lakh.
- Portfolio managerA body corporate registered with SEBI that, under a contract with a client, advises on or manages that client's securities or funds — discretionary, non-discretionary or advisory.
- Direct access facilityA facility requiring portfolio managers to let investors come to them directly, without a distributor, so that the investor avoids distribution costs — the PMS counterpart of a mutual fund direct plan.
- Execution only servicesA distribution model where the firm does not charge for advice and earns instead from commission on what it sells or executes, distinct from the fee-only advisory route an Investment Adviser must follow.
- FiduciaryA person who acts on behalf of another and is bound to put that other person's interest above their own — the standing SEBI regulation places every Investment Adviser in toward their clients.
- Implementation servicesThe execution of an Investment Adviser's recommendations in the securities market, which the adviser may offer to a client but only through direct schemes and without charging any fee or commission for it.
- Segregation of holdingsThe portfolio manager's duty to hold each client's securities in a separate account, and all clients' funds in a separate bank account with a Scheduled Commercial Bank.