Qualified Client Definition: 2026 Thresholds and Net Worth Rules

A qualified client is an investor who meets the SEC’s thresholds under Rule 205-3 of the Investment Advisers Act, which lets a registered investment adviser charge performance-based fees. Under the rules in effect in early 2026, you generally need more than $2.2 million in net worth or at least $1.1 million under the adviser’s management. Both figures are set to rise later in 2026.

Why the Designation Exists

The Investment Advisers Act generally bars registered advisers from taking a cut of your investment gains as their fee. The concern is incentives: an adviser who earns more when your portfolio grows has reason to take outsized risks with your money. Flat fees and percentage-of-assets fees keep that pressure in check.

Rule 205-3 carves out an exception for investors the SEC considers wealthy enough and sophisticated enough to evaluate performance-fee arrangements on their own. If you clear the bar, an adviser can tie its compensation to how well your investments perform. This is the standard fee structure inside hedge funds, private equity funds, and other alternative investment vehicles.

The Four Ways to Qualify

Rule 205-3 gives you four separate paths. You only need one.

Assets under management: at least $1.1 million with the adviser immediately after entering the contract.
Net worth: more than $2.2 million immediately before entering the contract, calculated under specific rules described below.
Qualified purchaser status: meeting the separate definition under the Investment Company Act, which for individuals generally requires owning at least $5 million in investments.
Relationship with the adviser: being an executive officer, director, trustee, general partner, or knowledgeable employee of the advisory firm.

Most individual investors use one of the first two. The timing distinction matters: the assets-under-management test is measured immediately after you sign, so money you’re about to place with the adviser counts. The net worth test is measured immediately before you sign, so you have to already be there.¹

How Net Worth Is Calculated

The net worth test has a few wrinkles, all involving your home.

Your primary residence does not count as an asset. This surprises people who assume home equity puts them over the line. The exclusion is meant to make the test reflect investable wealth, not the value of where you live.¹

Mortgage debt is partially excluded too, but only up to the home’s fair market value. If your home is worth $800,000 and you owe $600,000, both the asset and the debt drop out and the net effect is zero. If you owe $900,000 on that same $800,000 home, the extra $100,000 counts against your net worth.²

There is also an anti-gaming rule. If you borrow against your home shortly before signing, any increase in the mortgage balance beyond what it was 60 days earlier gets counted as a liability, unless the new borrowing was used to purchase the residence itself. A cash-out refinance or a home equity line of credit taken out to boost your liquid assets right before qualifying will not work.²

Married couples can combine assets and liabilities to meet the threshold jointly.¹

The 2026 Threshold Increase

The current figures of $1.1 million and $2.2 million took effect on August 16, 2021.³ The Dodd-Frank Act requires the SEC to adjust them for inflation roughly every five years, using a formula tied to the Personal Consumption Expenditures Price Index.

The next adjustment is close. In March 2026, the SEC published a notice of intent to raise the thresholds to $1.4 million for assets under management and $2.7 million for net worth.⁴ The final order has not yet been issued. When it is, the new thresholds take effect 60 days later.⁵

If you’re near the current bar and considering a performance-fee arrangement, the date you sign matters. Whichever thresholds are in effect the day the contract begins are the ones you’ll be measured against.

What Happens to Existing Contracts

An inflation adjustment does not invalidate a contract already in place. If you qualified under the thresholds in effect when you signed, your contract remains valid even if you would fall short of the new numbers. You don’t have to requalify each time the SEC bumps the figures.¹

The grandfathering extends to private fund investors: additional investments in the same fund are evaluated under the thresholds that applied when you first invested. New parties joining the contract after an adjustment must meet the updated numbers. So a fund’s existing investors can stay under the old rules while a new investor coming in after the change must clear the higher bar.

With the adjustment pending, signing before the new thresholds take effect locks in $1.1 million / $2.2 million. Waiting could mean needing $1.4 million / $2.7 million.

Qualified Client vs. Accredited Investor vs. Qualified Purchaser

These three labels overlap, and people mix them up. They serve different purposes and set different bars.

An accredited investor is the most common classification. You need $1 million in net worth excluding your primary residence, or income above $200,000 individually ($300,000 jointly) for the last two years. Being accredited lets you participate in private offerings under Regulation D. It does not, on its own, allow an adviser to charge you performance-based fees.

A qualified client sits in the middle. The current thresholds are $2.2 million net worth or $1.1 million under management, and this is the designation that unlocks performance-fee arrangements with registered investment advisers. Every qualified purchaser automatically counts as a qualified client, but not every qualified client is a qualified purchaser.¹

A qualified purchaser is the highest bar. Individuals must own at least $5 million in investments (investments specifically, not net worth), and entities need $25 million.⁶ This status grants access to 3(c)(7) funds, private funds that can accept unlimited investors as long as every one of them is a qualified purchaser.

The practical point: accredited status alone does not qualify you for performance-fee arrangements. If your adviser wants to charge incentive fees, you have to clear the qualified client bar through one of the four paths above.

Investing Through a Trust or Fund

The rule covers entities, not just individuals. A trust that meets the financial thresholds on its own can enter a performance-fee arrangement the same way a person can.

Pooled vehicles are treated differently. When a private investment company, registered investment company, or business development company enters a performance-fee contract, the adviser has to look through the entity to the equity owners underneath. Each owner who will bear the performance fee must individually qualify.¹ If a private fund is owned by another private fund, the look-through continues down to the ultimate investors.⁷ That is why subscription documents for private funds ask detailed financial questions: the fund manager has to verify qualification at every layer.

1
eCFR. 17 CFR 275.205-3 – Exemption From the Compensation Prohibition of Section 205(a) of the Act
2
eCFR. 17 CFR 275.205-3 – Exemption From the Compensation Prohibition of Section 205(a) of the Act
3
U.S. Securities and Exchange Commission. Inflation Adjustments of Qualified Client Thresholds – Fact Sheet
4
GovInfo. Federal Register Vol. 91, No. 61 – Notice of Intent To Issue an Order
5
U.S. Securities and Exchange Commission. Performance-Based Investment Advisory Fees
6
U.S. Securities and Exchange Commission. Defining the Term Qualified Purchaser Under the Securities Act of 1933
7
U.S. Securities and Exchange Commission. Exemption To Allow Investment Advisers To Charge Fees Based Upon a Share of Capital Gains Upon or Capital Appreciation of a Client’s Account