People who manage the investment portfolios of the rich are increasingly pitching for a model where they are only paid for the profits they make.

Investors typically paid portfolio management service (PMS) providers an annual fixed fee of around two per cent of the money they managed. They also paid them a share of profits made. This was usually around 20 per cent of gains above a certain threshold. This ‘two and 20’ model is giving way to a 'zero and 20' model, according to industry experts.

“We are increasingly seeing a trend wherein a service provider is willing to forgo fixed fees and agree to only ‘profit-share’. Essentially, the investor has to pay only when the returns are above the hurdle rate. Under this, the onus is on the fund manager to generate returns,” said Roopali Prabhu, director—head of investment products, Sanctum Wealth Management.

"We have recently launched a zero fixed fee model," said Akhil Chaturvedi Associate Director- Head-Sales and distribution at Motilal Oswal Asset Management Company, one of India's largest PMS players. He said that the model, which is on a select distribution channel basis, was started around three months ago. The idea was to encourage investors to not desist from investing in equities merely due to fees being levied in volatile times. Such investors would pay a certain percentage on profits on annual basis only when a certain basic hurdle on return is achieved, which in this case is six per cent. he said.

Typically, the hurdle rate can vary between six to ten per cent depending on different variable fee models.

Others in the industry are also likely to see similar zero fixed fee models according to him.

Daniel GM, founder-director at industry-tracker PMS Bazaar said that the balance has shifted in favour of investors from portfolio managers. Regulatory changes such as the introduction of a direct option is also a tailwind. The emergence of a pay-only-for-profit model to challenge the fixed fee model will not be a temporary trend, according to Daniel GM, as investors are now evaluating fees and not just the performance. “This will also co-exist,” he said.

The model has emerged during a period of regulatory change. The Securities and Exchange Board of India recently doubled the minimum investment size to Rs 50 lakhs. It also raised the net worth requirement from two crore rupees to five crore rupees. A circular on recent changes also talked about introducing a direct plan. This would mean that investors can enter a scheme without recourse to a distributor.

“Portfolio Managers shall provide an option to clients to be on-boarded directly, without intermediation of persons engaged in distribution services …Portfolio managers shall prominently disclose in its disclosure documents, marketing material and on its website, about the option for direct on– boarding,” said the circular dated February 13.

A large portion of the fixed fee in the first three years after an investor came on board often went to distributors, according to industry sources. The creation of a direct plan removes the need for high fixed fees. However, others also feel that given the limited presence and employee strength of these asset managers, a distribution network and appropriate fees may be necessary to garner assets.