NASAA Series 63Regulation of Investment Advisers and IARsHard
An investment adviser wants to charge a performance-based fee to a client whose account holds $900,000 under management with the adviser but who has a net worth of $2.5 million, excluding the value of a primary residence. Under the 'qualified client' standard, may the adviser charge this client a performance-based fee?
- ANo, because performance fees are prohibited for all retail clients regardless of net worth
- BYes, but only if the client also signs a special performance-fee disclosure waiver
- CNo, because the client's assets under management are below the $1.1 million threshold
- DYes, because the client's net worth exceeds the $2.2 million alternative threshold, excluding primary residence
Show answer & explanationAnswer & explanation
Correct answer: D. Yes, because the client's net worth exceeds the $2.2 million alternative threshold, excluding primary residence
A client qualifies for performance-based fees if they meet EITHER the AUM threshold (currently $1.1 million with the adviser) OR the net worth threshold (currently $2.2 million, excluding primary residence). This client fails the AUM test but satisfies the net worth alternative, so performance fees are permissible.
Why the other options are wrong
- A. Performance fees are permitted for qualified clients, not prohibited outright.
- B. No special waiver substitutes for meeting one of the qualified client thresholds.
- C. Failing one threshold does not disqualify the client if the alternative threshold is met.
Qualified Client Standard (Performance Fees)
Performance-based fees may only be charged to 'qualified clients' who meet either an AUM threshold ($1.1 million with the adviser) or a net worth threshold ($2.2 million excluding primary residence).
- Either threshold alone is sufficient
- Primary residence value is excluded from net worth calculation
- Thresholds are periodically adjusted for inflation by the SEC
Memory trick: Meet one gate, fee's not a debate.