The SEC is preparing to raise thresholds for performance fees

The Securities and Exchange Commission is preparing to raise the dollar thresholds that determine when RIAs can charge performance-based fees to certain clients, an update the agency frames as an inflation adjustment.

In a notice last week, the SEC said it “intends to issue an order that would adjust for inflation dollar amount thresholds” in the qualified client rule under the Investment Advisers Act of 1940. The rule generally allows performance-based fees only when a client meets minimum net worth or assets-under-management levels.

“The Commission’s order would increase, to reflect inflation, the minimum net worth” and would also increase “the minimum dollar amount of assets under management,” the notice said.

Among other moves, the SEC expects to boost the assets-under-management test to $1.4 million from $1.1 million, and raise the net worth test to $2.7 million from $2.2 million.

Assuming the order is issued, the SEC said it expects the change to take effect 60 days after the order date. The notice also says the updated thresholds generally would not apply retroactively to advisory relationships entered into before the effective date, although transitions would be subject to rule 205-3.

The SEC is also contemplating a change to how it defines "small" RIAs, with a new threshold of $1 billion to replace the previous $25 million bar. Several planning groups have expressed conditional support for that proposed move, which Commissioner Hester Peirce has told InvestmentNews would help the regulator "think about firms more realistically" assuming it pushes through.

Performance fees remain a niche pricing option across the RIA industry, but they are more common in certain parts of the market, particularly private funds and pooled vehicles where incentive compensation is a familiar feature.

A client who previously met the thresholds for performance-based fees may not qualify under the updated figures, depending on how the client’s net worth and AUM are measured under the rule. That can matter for both new client onboarding and for changes in an existing relationship – for example, when a new person or entity becomes a party to a contract.

In a client alert summarizing the SEC’s move, law firm Mayer Brown said the change “could alter which clients qualify for performance-based arrangements,” potentially leading advisers to revisit contracts and intake workflows. The firm also pointed to private funds as an area likely to feel the effects because performance fees can represent a sizable share of adviser revenue.

"Even modest increases could shift who qualifies for performance fees, making early planning and proactive compliance measures essential before the formal order is issued," the note from Mayer Brown read.

The regulatory update lands as RIAs continue to diversify how they charge clients, even as asset-based pricing remains the default. The most recent industry snapshot by the Investment Adviser Association found 95.5% of SEC-registered advisers offered asset-based fees in 2024, while 78.1% combined asset-based fees with other models, including fixed, hourly and performance fees.

Just under a quarter of advisers (23.7%) offered an asset-based fee paired with a performance fee, including 58.1% of advisers managing private funds.

According to the IAA, the use of performance fees has increased over the past 24 years, going up 13.7% from where they were in 2000, though usage of the model has dropped in the past decade outside the private fund space.