Unlike mutual funds, PMS or Portfolio Management Services can charge performance fees. The performance fee earned by the Portfolio Management Services is proportional to the return generated by the PMS strategy. Simply put, the higher the return generated by the PMS, the higher the performance fee they earn.A performance fee is an excellent way to align investor and portfolio manager interests.Yet, as per PMS Bazaar, only about 5% or 20 PMS strategies out of ~400 offer a performance fee only structure.This means that most PMS houses and strategies require you to pay a fixed management fee even if your investments are losing money.Let’s look at the major types of PMS fees before continuing our discussion.Types Of PMS FeesPortfolio Management Services charge 3 major types of fees:1. Fixed management fee2. Variable performance fee3. Exit loadFixed Management FeeFixed management fee is the portfolio manager’s charge for managing your money. It is charged as a percentage (like 1%) of your investment value.Portfolio managers need to have a team for analyses of securities, an operations team to execute the orders, a customer service team for investor support etc.Portfolio managers operate with these fixed costs and charge a fixed management fee to pay salaries and run necessary departments.However, beyond a point, fixed management fee gets directly added to the portfolio manager’s profit. This is because the costs are fairly fixed even if the number of clients and money managed increases.For example - The portfolio manager needs to spend roughly the same amount of money to manage Rs. 200 for 2,000 clients as well as Rs. 1,000 crore for 20,000 clients. In the first case, assuming a 1% management fee, the portfolio manager collects Rs. 2 crore, whereas in the second case they collect a whopping Rs. 10 crore.Because of this, portfolio managers are incentivized to increase their AUM (assets under management) rather than improve their performance to benefit their clients.Variable Performance FeeA variable performance fee is exactly what it says - a variable fee that is charged based on the performance delivered by the PMS strategy.The fee is a fixed number in percentage terms (like 20% of profits). However, financial markets don’t deliver the same returns every year. Hence, the absolute performance fee collected by portfolio managers every year varies.While management fee creates misaligned interests, performance fee creates an alignment of interests between the investor and the portfolio manager.For example: A portfolio manager charges 20% of profits as their performance fee. If they deliver 10% returns, they make just 2% in performance fee (20% of 10% is 2%). However, if they deliver 15% returns, they make 3% in performance fee. So, if the portfolio manager has an AUM of Rs. 1,000, that’s an extra Rs. 2.5 crore in performance fee. You and the PMS are better off in the second case.Does Your Portfolio Manager Have Their ‘Skin In The Game’?So, having a performance fee only structure indicates a high degree of ‘skin in the game.’Think about it: By offering a performance fee only structure, the portfolio manager is essentially saying that if they can’t deliver performance and collect fees purely through performance, they don’t deserve to survive.But there’s another indicator of ‘skin in the game.’ If the PMS and their promoters/employees invest a substantial proportion of their net worth, they will likely treat your money as important as their own.So, there are two clear signs of ‘skin in the game’ that can help you identify well-intentioned portfolio managers -1. A performance fee only fee structure2. Promoter/employee assets invested in the same strategiesDezerv Has Their Skin In The GameDezerv PMS is a series-A funded wealth management startup that offers several PMS strategies.But that’s not all. Dezerv PMS is also among the most well-intentioned portfolio managers in the country today.In all, Dezerv manages over Rs. 3,000 crore worth of assets. Around 50% of these are managed through their PMS strategies.Here are two great things about Dezerv:1. Dezerv has a performance fee only structure with a water mark clause. This means 0% fixed management fee. Even the performance fee is just 5%, far lower than the industry standards (10%/20%).2. More than 5% of PMS assets belong to the promoters, employees, friends and family. This means Dezerv’s key personnel invest in the same investment strategies that their clients do.Founded in 2021, Dezerv has set out to solve the problems of the traditional wealth management industry. Dezerv’s founders are industry veterans who have previously held top positions at companies like IIFL Wealth, Kotak Wealth, Anand Rathi Wealth etc.As of September, Dezerv manages over Rs. 3,000 crore worth of assets through mutual fund portfolios, corporate bonds, PMS, and AIF strategies. The Dezerv Wealth Monitor App tracks over Rs. 12,000 crore worth of mutual funds and provides users actionable insights to optimize their portfolios.Disclaimer: This article is a paid publication and does not have journalistic/editorial involvement of Hindustan Times. Hindustan Times does not endorse/subscribe to the content(s) of the article/advertisement and/or view(s) expressed herein. Hindustan Times shall not in any manner, be responsible and/or liable in any manner whatsoever for all that is stated in the article and/or also with regard to the view(s), opinion(s), announcement(s), declaration(s), affirmation(s) etc., stated/featured in the same. This information does not constitute a financial advice.