Three Types of PMS — Discretionary, Non-Discretionary, Advisory
SEBI's regulations describe three kinds of service a portfolio manager may offer: discretionary, non-discretionary and advisory. This lesson explains who decides and who carries out the transactions in each, and what stays the same whatever the type.
Two questions that separate the three types
Every investment in a portfolio involves two steps: someone decides what to buy or sell, and someone carries out the transaction. The three service types differ only in who does each step.
Ask those two questions of any PMS arrangement and the type becomes clear. The answer is recorded in the agreement between the client and the portfolio manager.
Discretionary
In a discretionary service the portfolio manager takes the investment decisions and carries them out, without asking the client each time. The manager acts within the terms of the client agreement, so the discretion is not unlimited.
The client hands over day-to-day decisions, not ownership. The securities still belong to the client, and the manager's decisions can lose money as well as make it.
Non-discretionary
In a non-discretionary service the client takes each investment decision and the portfolio manager executes it. Nothing is bought or sold until the client has decided.
The practical effect is that the client stays involved in every transaction. That takes time and attention, and the outcome then depends on the client's own decisions as well.
Advisory
In an advisory service the portfolio manager only gives advice. The client decides whether to act on it and also arranges the transactions.
Advisory is therefore the only type in which both steps, the decision and the carrying out, stay with the client. 'Advisory' here is the name of one of the three service types in SEBI's regulations for portfolio managers.
What does not change
Whatever the type, the account is the client's own and the client owns the securities. No type of service removes market risk or assures returns: the securities are exposed to the same price movements whoever chose them.
One rule does differ by type. Where a performance fee is charged, the high-water-mark principle applies to discretionary and non-discretionary services, not to advisory services.
The service type is also separate from the Strategy. SEBI recognises four PMS Strategies (Equity, Debt, Hybrid and Multi Asset), which describe what the portfolio invests in. 'Hybrid' is a Strategy, not a kind of service.
Rules at a glance
One idea, three arrangements
Suppose shares of a listed engineering company are being considered for the portfolio of a client, Leela. Who decides, and who carries out the purchase, depends on the service she has signed up for.
Under a discretionary agreement, the manager decides and buys the shares for her account without asking her first. Under a non-discretionary agreement, the purchase happens only if Leela herself decides on it; the manager then executes it. Under an advisory agreement, the manager gives Leela advice and stops there: she decides and arranges the transaction herself.
In all three cases the shares, once bought, are Leela's, and their price can fall as well as rise.
Key points
- Discretionary: the portfolio manager decides what to buy and sell and carries out the transactions, within the client agreement.
- Non-discretionary: the client takes each investment decision and the manager executes it.
- Advisory: the manager only gives advice; the client decides and arranges the transactions.
- In every type the account and the securities belong to the client.
- The high-water-mark principle for performance fees applies to discretionary and non-discretionary services, not advisory.
- No service type removes market risk or assures returns.
Common misunderstandings
- Discretionary does not mean the manager owns or controls the assets outright: the manager decides within the client agreement and the client remains the owner.
- Non-discretionary does not mean the manager has no role: the client decides, but the manager executes the transactions.
- Advisory and non-discretionary are not the same thing: in both the client decides, but only in advisory does the client also arrange the transactions.
- Hybrid is not a fourth service type: it is one of SEBI's four PMS Strategies.
Questions people ask
In a discretionary PMS, does the manager ask before each trade?
No. The manager decides and carries out the transactions without seeking the client's approval each time, but only within the terms agreed with the client.
Who places the order in a non-discretionary PMS?
The portfolio manager. The client takes the decision on each transaction and the manager carries it out.
Where is the type of service recorded?
In the agreement between the client and the portfolio manager, which also sets out the fees.
What this lesson relies on
- SEBI (Portfolio Managers) Regulations, 2020 (as amended to 3 September 2025)
- SEBI Master Circular for Portfolio Managers, 16 July 2025
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.