Qualified Client
Qualified Client
An investor classification that allows performance-based compensation under Investment Advisers Act Rule 205-3. Requires either at least $1.1 million in assets under management with the adviser OR net worth in excess of $2.2 million (excluding primary residence). A subset of accredited investors with higher thresholds, specifically for charging performance fees.
A client with $1.2 million under management with an adviser qualifies for performance fees (meets the "at least $1.1M" AUM test). However, a client with exactly $2.2 million net worth does NOT qualify (must be "in excess of" $2.2M). An officer of the adviser firm automatically qualifies regardless of wealth.
Students frequently confuse qualified client thresholds ($1.1M AUM / $2.2M net worth) with accredited investor thresholds ($1M net worth / $200K income). Critical distinction: "at least" $1.1M (inclusive: $1.1M exactly qualifies) versus "in excess of" $2.2M (exclusive: $2.2M exactly does NOT qualify). Also confusing which assets count toward which test.
How This Is Tested
- Determining if a client qualifies for performance-based fees using the AUM test (at least $1.1M with THIS adviser)
- Calculating net worth excluding primary residence to determine if client exceeds $2.2M threshold
- Distinguishing "at least" $1.1M (inclusive) from "in excess of" $2.2M (exclusive) phrasing
- Identifying that qualified client is a subset of accredited investor with higher thresholds
- Understanding that officers/directors of the adviser automatically qualify as qualified clients
- Recognizing the HELOC exception: home equity lines drawn within 60 days count as debt
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| Qualified client: Assets under management | At least $1.1 million | With THIS investment adviser after entering contract (inclusive: $1.1M exactly qualifies) |
| Qualified client: Net worth | In excess of $2.2 million | Before entering contract (exclusive: $2.2M exactly does NOT qualify). Excludes primary residence. |
| Qualified purchaser (automatic qualification) | $5 million+ in investments | Qualified purchasers automatically qualify as qualified clients (higher threshold) |
| Officer/director/experienced IAR | 12+ months in industry | Officers, directors, or experienced IARs of the adviser automatically qualify |
| Threshold adjustment frequency | Every 5 years | SEC adjusts for inflation based on Personal Consumption Expenditures Chain-Type Price Index |
Example Exam Questions
Test your understanding with these practice questions. Select an answer to see the explanation.
Lisa, a prospective client, is considering an investment adviser who charges performance-based fees. She has $950,000 under management with this adviser, owns a primary residence worth $1.2 million with a $300,000 mortgage, has $800,000 in a 401(k), and $500,000 in other investments. Does Lisa qualify as a qualified client for performance fee purposes?
C is correct. Lisa does NOT qualify as a qualified client under either test. For the AUM test, she has only $950K with THIS adviser (below "at least $1.1M"). For the net worth test, we exclude the primary residence entirely: $800K (401k) + $500K (other investments) = $1.3M, which does NOT exceed $2.2M.
A incorrectly includes the primary residence value in net worth. B incorrectly assumes total investments count toward the AUM test, but only assets managed by THIS specific adviser count. D is incorrect because performance fees ARE permitted for qualified clients who meet the thresholds.
The Series 65 exam tests your ability to apply both qualified client tests: the AUM test (at least $1.1M with THIS adviser only) and the net worth test (in excess of $2.2M excluding primary residence). Understanding that these are two separate pathways and correctly excluding the primary residence from net worth is critical for determining client eligibility.
Under Investment Advisers Act Rule 205-3, which of the following accurately describes the qualified client requirements for charging performance-based fees?
B is correct. Rule 205-3 defines a qualified client as someone with "at least $1.1 million" (inclusive) under management with the adviser OR net worth "in excess of $2.2 million" (exclusive) excluding the primary residence. Note the different phrasing for each test.
A describes the old accredited investor threshold ($1M net worth), not the qualified client threshold. C reverses the phrasing: the AUM test uses "at least" (inclusive) while the net worth test uses "in excess of" (exclusive). D describes accredited investor thresholds, which are different from and lower than qualified client thresholds.
The Series 65 exam specifically tests the exact phrasing of these thresholds. Understanding that "at least $1.1M" means $1.1M exactly qualifies, while "in excess of $2.2M" means $2.2M exactly does NOT qualify, is a frequently tested distinction that catches many candidates who assume the phrasing is interchangeable.
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Access Free BetaA client is evaluating whether they qualify as a qualified client. They have: $700,000 in a brokerage account, $400,000 in retirement accounts, $1.8 million primary residence with a $600,000 mortgage, $300,000 in a vacation home with no debt, and $100,000 in cash. A home equity line of credit (HELOC) of $50,000 was drawn 45 days ago. What is the client's net worth for qualified client determination, and do they qualify?
B is correct. Calculate qualified client net worth:
Included assets: $700K (brokerage) + $400K (retirement) + $300K (vacation home) + $100K (cash) = $1.5M
Excluded: Primary residence value ($1.8M) and mortgage ($600K) are both excluded from the calculation
HELOC adjustment: The $50K HELOC drawn within 60 days MUST be counted as debt (exception to primary residence exclusion)
Net worth = $1.5M assets - $50K HELOC debt = $1.45M (rounds to $1.50M)
Since $1.45M does NOT exceed $2.2M, the client does NOT qualify.
A ($2.65M) and D ($2.70M) incorrectly include primary residence equity. C ($1.55M) would be correct if we miscalculated the HELOC impact.
The Series 65 exam tests the HELOC exception rule: home equity lines of credit drawn within 60 days before the investment must be counted as debt, even though the primary residence itself is excluded. This is a tested exception that catches candidates who think ALL primary residence-related items are excluded from the net worth calculation.
All of the following statements about qualified clients are accurate EXCEPT
B is correct (the EXCEPT answer). A client with exactly $2.2 million net worth does NOT qualify because the rule requires net worth "in excess of $2.2 million" (exclusive). The client must have MORE than $2.2 million, not exactly $2.2 million. This is a critical distinction the exam tests repeatedly.
A is accurate: The AUM test uses "at least $1.1 million" (inclusive), so exactly $1.1M qualifies. C is accurate: Officers, directors, and experienced IARs (12+ months) of the adviser automatically qualify regardless of wealth. D is accurate: The SEC adjusts qualified client thresholds every 5 years for inflation based on the Personal Consumption Expenditures Chain-Type Price Index (most recent adjustment in 2022).
The Series 65 exam specifically tests the distinction between "at least" (inclusive, meaning the exact amount qualifies) and "in excess of" (exclusive, meaning the exact amount does NOT qualify). This phrasing difference between the AUM test and net worth test is a common trap that catches candidates who don't pay attention to the precise regulatory language.
An investment adviser is evaluating whether a prospective client qualifies for performance-based fee arrangements. The client has $900,000 under management with this adviser, total investments of $2.5 million, net worth of $2.3 million (excluding primary residence), and is a certified public accountant. Which of the following statements are accurate?
1. The client qualifies based on AUM with this adviser
2. The client qualifies based on net worth
3. The client qualifies based on professional credentials
4. The client must increase AUM with this adviser to $1.1 million to qualify
A is correct. Only statement 2 is accurate.
Statement 1 is FALSE: The client has $900K with this adviser, which is below the "at least $1.1M" threshold. Total investments elsewhere do not count toward the AUM test (only assets managed by THIS adviser count).
Statement 2 is TRUE: The client has $2.3M net worth excluding primary residence, which exceeds (is "in excess of") the $2.2M threshold. The client qualifies via the net worth test.
Statement 3 is FALSE: Being a CPA does NOT automatically qualify someone as a qualified client. Only officers/directors of the adviser firm or experienced IARs (12+ months in the industry) qualify automatically. Series 7, 65, or 82 licenses can make someone an accredited investor, but not automatically a qualified client.
Statement 4 is FALSE: While increasing AUM to $1.1M would create an additional qualification path, the client ALREADY qualifies through the net worth test, making this unnecessary.
The Series 65 exam tests understanding of multiple pathways to qualified client status: AUM with THIS specific adviser (at least $1.1M), net worth (in excess of $2.2M), officer/director status, experienced IAR status, or qualified purchaser status ($5M+ investments). Understanding that professional credentials like CPA or Series 65 license relate to accredited investor status, not automatic qualified client status, is important.
💡 Memory Aid
Qualified Client = "1-1-2-2: Performance Pay Permission": $1.1M AUM (at least, inclusive) OR $2.2M net worth (in excess of, exclusive) = Permission to charge performance fees. Remember: "At Least = ALL of 1.1" (exactly $1.1M works), but "In Excess = EXCLUDE exactly 2.2" ($2.2M exactly fails). Primary residence? OUT!
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Where This Appears on the Exam
This term is tested in the following Series 65 exam topics: