Disadvantages of PMS

PMS accounts have drawbacks too. For starters, there are all kinds of money managers: good, bad, mediocre, and cheats. Clearly, it’s not worth paying for anything less than the best manager you can find. You cannot also find out who is good and who is not on any unbiased platform.

There is no way how you can know about the standard deviation, beta, Co-variance, etc. for the portfolio. At least theoretically it is difficult to compare 2 fund managers if you have given them different mandates. I have a friend who has about Rs. 30 million in PMS. He made sensational money in a Rs. 5 million portfolio in 2008 (the world was bleeding) by trading puts in this portfolio. His 3 managers have such a different mandate that he does not even meet them on the same day!

Then there is the matter of costs. Managed accounts are generally cheaper than using a full-service broker in a transaction-based relationship. Still, no one can manage your money more inexpensively than you can on your own. If your portfolio manager and broker are different you stand a fairer chance of getting a good deal. I know of a big portfolio manager who launched a PMS a few years ago. His manager was so stupid that he told me this was ‘backward integration’ – of course I did not tell the ‘boss-man’. Knowing him this manager would have lost his job. I have not seen any of their portfolios, but as a brand it is not a brand that I would trust my money with.

Managed accounts are generally not for do-it-yourselfers. If you enjoy the investment process, have the time and expertise to implement your own investment strategy, and are satisfied with your results, you don’t need to turn your money over to someone else to manage. However if you are managing say upwards of Rs. 50 Million it is worth giving away a part of your money – that portion will be saved the emotions that your portfolio goes through.

Managed accounts are not meant for everybody. However, I speak to a lot of investors who realize they could be doing a lot better than they are. They know they should asset allocate their portfolios, but they do not. They know they should not be emotional, but cannot sell shares their grandfathers gave them. They realize they have no money to pay for the right shares. They know if they need money 6 months from now they should reallocate, but they do not. They do not want to be over- or under-diversified, but will not email their portfolios to me, lest I rip it apart. Many of these people are smart, sophisticated investors, incidentally. They’re just too busy running a company, taking care of their families or pursuing their interests to give their portfolios the attention they deserve.

I promise to do a risks on putting your money in a PMS soon…

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