As of today, June 29, 2026, the SEC’s higher “qualified client” thresholds are in force. Net worth moves from $2.2 million to $2.7 million, and the assets-under-management test moves from $1.1 million to $1.4 million. These are the thresholds that permit SEC-registered investment advisers to charge performance-based fees to managed account clients and private fund investors. The grandfathering line is now drawn. Every advisory agreement signed through yesterday is governed by the old standard; every new client, new subscription, or materially amended contract from today forward must clear the higher bar. The compliance task is no longer to beat a deadline. It is to prove, in writing, which side of today’s line each performance-fee relationship sits on.
Key Takeaways
- Effective June 29, 2026, SEC-registered RIAs may charge performance-based fees only to clients with net worth above $2.7 million (excluding primary residence) or $1.4 million in assets under management with the specific adviser.
- Advisory agreements signed before today are grandfathered as long as the arrangement continues unchanged. Any new subscriber, new client, or materially amended agreement from today forward must meet the updated thresholds.
- Clients with net worth between $2.2 million and $2.7 million who are already in performance-fee accounts need explicit documentation confirming their agreement predates June 29.
- The same threshold applies to private fund subscriptions. Any new limited partner commitment dated today or later must meet $2.7 million net worth or $1.4 million invested with the fund’s adviser.
- The SEC adjusts these thresholds every five years using the PCE price index, rounded to the nearest $100,000. The prior adjustment took effect December 14, 2021. The next review falls in late 2031.
What Changed, and Why the SEC Adjusts This Threshold
The Investment Advisers Act of 1940 generally prohibits SEC-registered advisers from charging performance-based fees. The exemption under Rule 205-3 allows performance compensation only when the client qualifies as a “qualified client,” a standard meant to identify investors able to assess and bear the risk of incentive-based fee structures.
The Dodd-Frank Act of 2010 requires the SEC to adjust the dollar thresholds for inflation every five years using the PCE price index, rounded to the nearest $100,000. The first post-Dodd-Frank adjustment set the floor at $2 million net worth and $1 million AUM, effective September 19, 2011. The most recent prior adjustment moved it to $2.2 million and $1.1 million, effective December 14, 2021.
The 2026 adjustment reflects roughly 22.7% cumulative PCE inflation since December 2021:
- Net worth: $2.2 million × 1.227 ≈ $2.70 million, rounds to $2.7 million
- AUM with adviser: $1.1 million × 1.227 ≈ $1.35 million, rounds to $1.4 million
The SEC issued its notice of intent on March 12, 2026 and its final order on April 28, giving advisers a 90-day runway. That runway closes today. The thresholds apply to both managed account arrangements and private fund investors, so an RIA that runs performance-fee separate accounts alongside a private fund now faces the new bar across both pools of clients.
Which Clients Sit in the Transition Zone?
The immediate task is identifying who falls in the $2.2 million to $2.7 million net worth band (excluding primary residence and certain related debt) or the $1.1 million to $1.4 million AUM band with the firm. Those are the clients the old rule qualified and the new rule would not.
Grandfathering protects existing clients, but only those whose advisory agreements were in place before today. The compliance risk concentrates in three scenarios.
Scenario 1: Existing performance-fee accounts with net worth between $2.2M and $2.7M. These clients stay grandfathered as long as the advisory agreement remains materially unchanged. If the adviser and client renegotiate fee terms, change the investment mandate, or execute a new engagement letter now, the grandfather protection dissolves and the $2.7 million threshold applies immediately.
Scenario 2: Clients with AUM between $1.1M and $1.4M with the firm. This is the less-discussed group. A client with $1.25 million under management with the specific RIA and a net worth below $2.7 million no longer qualifies for performance fees on a new agreement. An existing agreement is grandfathered, but the same rule holds: no material amendments.
Scenario 3: New clients in the onboarding pipeline. Any prospect signing an advisory agreement from today forward who has net worth below $2.7 million, and less than $1.4 million invested with the firm, cannot be placed in a performance-fee account. According to the Holland & Knight client alert, additional investments into an existing grandfathered arrangement generally keep their protected status, but any restructuring of the underlying agreement triggers the new threshold.
How Does Grandfathering Actually Work Under Rule 205-3?
The grandfathering provision under Rule 205-3(c)(1)(ii) states that contracts entered into before the effective date of a threshold increase are not required to comply with the increase. The prior $2.2 million standard continues to govern those relationships.
What does not get grandfathering protection:
- A new client who was not previously party to an advisory agreement with that specific adviser
- A new investor subscription in a private fund where the investor was not a limited partner as of June 29
- An amended agreement where performance fee terms, the investment mandate, or fee levels are materially renegotiated on or after today
- A transferred book of business in an acquisition where new advisory agreements are executed with the acquiring firm post-close
That last point matters for firms in acquisition talks. Echelon Partners reported 142 RIA transactions totaling $1.67 trillion in AUM in Q1 2026, and the pace has held into the second quarter. Advisers whose books are transferring this summer need explicit legal guidance on whether grandfathered performance-fee accounts carry through to the successor adviser, or whether new agreements, and therefore the new thresholds, are required at close.
The SEC has not issued a specific exemption for M&A-driven account transfers under Rule 205-3. Some transactions use assignment-with-client-consent frameworks that may preserve the original agreement’s terms. Others require new agreements as a condition of the deal. The answer is fact-specific, and the cost of getting it wrong is high.
What Happens If an RIA Charges Performance Fees to a Newly Disqualified Client?
The consequences run through two channels, regulatory and contractual.
On the regulatory side, Section 205(a)(1) of the Advisers Act prohibits performance-based compensation arrangements that do not comply with Rule 205-3. An RIA that charges a performance fee to a client who does not meet the new threshold is in direct violation of the Act. SEC examiners routinely cite Rule 205-3 failures in deficiency letters, and the most serious cases reach enforcement. Paul Weiss noted in its client memo that the Division of Examinations has flagged qualified client documentation gaps as a recurring finding in recent RIA exams, even before this change.
On the contractual side, a performance-fee arrangement with a non-qualifying client may be unenforceable. Courts in several circuits have held that advisory contracts violating the Advisers Act are void or voidable, meaning the adviser may be unable to collect performance fees charged improperly, even if the client paid them without objection at the time.
The practical risk is highest for firms that onboard new clients quickly without building the threshold check into the intake workflow. An RIA that places a $2.4 million net worth prospect into a performance-fee account in July without running the updated screen is non-compliant from day one of that relationship.
Why Do Performance Fees Matter More Than Ever for RIA Valuations?
With consolidation reshaping independent advisory businesses at a record pace, and DeVoe reporting the average seller in Q1 2026 held $1.16 billion in AUM at deal multiples of 12 to 14 times EBITDA, the composition of an RIA’s revenue feeds directly into acquisition price.
Performance fees are structurally high-margin revenue. A $500 million RIA charging 1% flat earns $5 million a year. The same firm running a performance fee on part of its book, say 0.75% base plus 15% above a hurdle, earns materially more in strong markets, and that upside is what buyers pay a premium for. Acquirers running due diligence from today forward will ask about the grandfathering status of every performance-fee account in the book.
Firms that cannot show documented compliance, meaning signed agreements predating June 29 for every performance-fee client in the $2.2 million to $2.7 million range, face one of two outcomes in diligence: a purchase price adjustment for the regulatory exposure, or a requirement to unwind the fee structure for those clients before close. The exposure is sharpest for the PE-backed aggregators that dominate the buy side, where sponsor-level compliance teams review fee arrangements across every tuck-in.
The Compliance Audit Every RIA Should Run This Week
The deadline has passed, which changes the work from racing the clock to building the file. The sequence:
Step 1: Pull the performance-fee roster. List every client charged any form of performance-based compensation: fulcrum fees, carried interest, incentive allocations, or any structure where the adviser earns more when the account outperforms.
Step 2: Map net worth and AUM to the new thresholds. For each client, confirm net worth excluding the primary residence and related debt, and AUM held with this specific adviser. Flag every client under $2.7 million net worth or $1.4 million AUM.
Step 3: Document the grandfathering basis now. For each flagged client, confirm a signed advisory agreement dated before June 29 is on file, that it has not been materially amended, and that no amendment is planned. Record the determination in the client file with a date stamp and a principal’s sign-off. This is the document an examiner will ask for.
Step 4: Lock down the new-client workflow. Any prospect signing from today forward must clear the $2.7 million or $1.4 million test before performance fees attach. Build the check into intake so a borderline client cannot slip through on a standard account opening.
Step 5: Update the paperwork. Replace the prior $2.2 million and $1.1 million figures wherever they appear: the intake workflow, the ADV Part 2A fee disclosure, and the advisory agreement template. Form ADV should reflect current practice on the next annual or interim amendment.
Step 6: Brief the advisory team. Portfolio managers and relationship managers need to know that opening a new performance-fee account, adding a named party to an existing agreement, or accepting a new fund investor now triggers a threshold check rather than a routine process.
Three Questions Advisors Should Ask This Week
1. How many clients on our performance-fee roster have net worth between $2.2 million and $2.7 million, and does each file hold a signed pre-June 29 agreement? This is the core question an examiner will test. A firm that cannot answer it within a day should run the audit now.
2. Does our new-client intake actually block a sub-$2.7 million prospect from a performance-fee account, or does it rely on someone remembering the rule? The risk has shifted from the calendar to the workflow. A process that depends on memory will fail an exam eventually.
3. If we are in acquisition talks, what happens to grandfathered performance-fee accounts at close, and will the buyer require new agreements? Most sellers in active deal processes do not raise this until legal review. With private equity behind most buyers and deal-team lawyers running systematic compliance checks, the answer affects deal economics and timeline.
Sources: SEC Final Order IA-6873 (April 28, 2026); Investment Advisers Act of 1940, Section 205; Rule 205-3 under the Advisers Act; Dodd-Frank Act, Section 418; Holland & Knight, Akin Gump, Kirkland & Ellis, Dorsey, Davis Graham, and Polsinelli client alerts (May to June 2026); Paul Weiss client memo (May 2026).
About Me
Associate Editor of financial news at Market signals where he writes and edits original analysis in and around the wealth management, as well as other parts of the financial markets and economy. He has more than five years of experience editing, proofreading, and fact-checking content on current financial events and politics.
