Going forward, investment advisors will no longer be able to include the value of an investor's home in a new $1 million minimum of investable assets now required to charge performance fees, according to the SEC, which is tightening its rule around fees.
Up until now, the SEC has permitted RIAs to charge these fees for investors with $750,000 in investable assets and a net worth of $1.5 million. Those thresholds now will rise to $1 million in investable assets and $2 million in net worth.
Investors who meet the net worth or asset threshold are deemed to be “qualified clients” able to bear the risks associated with performance fee arrangements. The new rule will also prevent RIAs from using a client’s property-related debts from the net worth calculation.
The new rule probably won’t mean all that much for those RIAs who cater to high-net-worth individuals, or those clients who weren’t really close to borderline in terms of being appropriately placed in a performance fee structure, says Patrick J. Burns, president of Beverly Hills, Calif.-based investment advisory compliance consulting firm Advanced Regulatory Compliance. Burns says his clients would fall into the category of those really not much affected by this rule change.
Advisors who might be more affected by the change are those who were putting clients into performance fee structures even if those clients probably didn’t belong in that type of fee structure — and that would include clients who had most of their money tied up in the value of their home, Burns says. The new rule will prevent that from happening, he says.
These new levels were set by a Commission order in July 2011, and the increase in thresholds was required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
Under a new grandfather provision to the performance fee rule, RIAs may continue to charge clients performance fees if the clients were considered “qualified clients” before the rule changes. The grandfather provision also will permit newly registering investment advisors to continue charging performance fees to those clients who were already paying them.
In addition, under the revised rule, every five years the Commission will issue an order making inflation adjustments to the dollar thresholds used to determine whether an individual or company is a qualified client, as required by the Dodd-Frank Act.
These changes will take effect 90 days after publication in the Federal Register, the official journal of the federal government, but investment advisors may rely on the grandfather provisions before then. The publication date is expected in a matter of days, according to an SEC spokeswoman.
Ann Marsh and Danielle Reed write for Financial Planning.