Are Registered Investment Advisors charging performance fees?

Yes, Registered Investment Advisors (RIAs) can charge performance fees, but there are specific regulations and guidelines they must adhere to. Performance fees are often based on the growth of the client’s portfolio and align the advisor’s incentives with the client’s investment success. However, under the Investment Advisers Act of 1940, RIAs can only charge these fees if the client is considered a “qualified client,” meaning they meet certain net worth or asset thresholds. The rationale is to protect less sophisticated investors from potentially aggressive fee structures. Moreover, the terms of the performance fee must be clear, disclosed in advance, and include a “high-water mark” provision to ensure fees are only paid on net gains. While these fees can motivate advisors to optimize portfolio performance, they also introduce a level of complexity and potential risk, as advisors might take on more aggressive investment strategies to earn higher fees. Hence, it is crucial for clients to thoroughly discuss and understand any performance fee structure with their RIA before proceeding.