Definition
Qualified Client
An investor classification that allows performance-based compensation under Investment Advisers Act Rule 205-3. Requires at least $1.4 million in assets under management with the adviser, or net worth in excess of $2.7 million (excluding primary residence), under thresholds effective June 29, 2026; qualified purchasers and certain executive officers and investment-active employees of the adviser also qualify. A separate test from the accredited investor standard, with higher dollar thresholds, used specifically for charging performance fees.
A client with $1.5 million under management with an adviser qualifies for performance fees (meets the "at least $1.4M" AUM test in effect since June 29, 2026). However, a client with exactly $2.7 million net worth does not qualify on net worth (must be "in excess of" $2.7M). An executive officer, director, trustee or general partner of the adviser qualifies regardless of wealth.
Students frequently confuse qualified client thresholds ($1.4M AUM / $2.7M net worth since June 29, 2026) with accredited investor thresholds ($1M net worth / $200K income). Critical distinction: "at least" $1.4M (inclusive: $1.4M exactly qualifies) versus "in excess of" $2.7M (exclusive: $2.7M exactly does not qualify). Also confusing which assets count toward which test.
How is Qualified Client tested on the exam?
- Determining if a client qualifies for performance-based fees using the AUM test (at least $1.4M with this adviser, effective June 29, 2026)
- Calculating net worth excluding primary residence to determine if client exceeds the $2.7M threshold
- Distinguishing "at least" $1.4M (inclusive) from "in excess of" $2.7M (exclusive) phrasing
- Distinguishing qualified client from accredited investor, a separate test with lower dollar thresholds
- Understanding that executive officers, directors, trustees and general partners of the adviser, and certain investment-active employees, qualify regardless of wealth
- Recognizing the HELOC exception: an increase in home-secured debt within the 60 days before the contract counts as a liability
Regulatory limits
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| Qualified client: Assets under management | At least $1.4 million (effective June 29, 2026) | With this investment adviser after entering contract (inclusive: $1.4M exactly qualifies) |
| Qualified client: Net worth | In excess of $2.7 million (effective June 29, 2026) | Before entering contract (exclusive: $2.7M exactly does not qualify). Excludes primary residence. |
| Qualified purchaser (automatic qualification) | $5 million+ in investments | Qualified purchasers automatically qualify as qualified clients (higher threshold) |
| Executive officers, directors and investment-active employees | Employees: 12+ months in those or substantially similar duties | Executive officers, directors, trustees, general partners, and employees (not performing solely clerical, secretarial or administrative functions) who participate in the adviser's investment activities, and who have performed those or substantially similar duties for the adviser or another company for at least 12 months, qualify regardless of wealth |
| Threshold adjustment frequency | Approximately every 5 years | SEC adjusts for inflation based on Personal Consumption Expenditures Chain-Type Price Index |
Qualified Client = "1.4 / 2.7: Performance Pay Permission": $1.4M AUM (at least, inclusive) or $2.7M net worth (in excess of, exclusive) = permission to charge performance fees (thresholds effective June 29, 2026). Remember: "At least = all of 1.4" (exactly $1.4M works), but "in excess = exclude exactly 2.7" ($2.7M exactly fails). Primary residence? Out.
Practice questions
Test your understanding with the questions below. Pick an answer to reveal 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 $1.4M", the threshold effective June 29, 2026). For the net worth test, we exclude the primary residence and its mortgage: $950K (with this adviser) + $800K (401k) + $500K (other investments) = $2.25M, which does not exceed $2.7M.
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 $1.4M with this adviser only) and the net worth test (in excess of $2.7M 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 $1.4 million" (inclusive) under management with the adviser or net worth "in excess of $2.7 million" (exclusive) excluding the primary residence, under thresholds effective June 29, 2026. Note the different phrasing for each test.
A describes the accredited investor net worth threshold ($1M), 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 $1.4M" means $1.4M exactly qualifies, while "in excess of $2.7M" means $2.7M exactly does not qualify, is a frequently tested distinction that catches many candidates who assume the phrasing is interchangeable.
A 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
Since $1.45M does not exceed $2.7M (the threshold effective June 29, 2026), the client does not qualify.
A ($2.65M) and D ($2.70M) incorrectly include the $1.2M of primary residence equity (D also ignores the HELOC). C ($1.55M) adds the HELOC instead of subtracting it.
The Series 65 exam tests the HELOC exception rule: an increase in debt secured by the primary residence within the 60 days before the advisory contract must be counted as a liability, 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 exception). A client with exactly $2.7 million net worth does not qualify because the rule requires net worth "in excess of $2.7 million" (exclusive). The client must have more than $2.7 million, not exactly $2.7 million. This is a critical distinction the exam tests repeatedly.
A is accurate: The AUM test uses "at least $1.4 million" (inclusive), so exactly $1.4M qualifies. C is accurate: Executive officers, directors, trustees and general partners of the adviser, and employees who participate in its investment activities and have performed those or substantially similar duties, for the adviser or another company, for at least 12 months, qualify regardless of wealth. D is accurate: The SEC adjusts qualified client thresholds approximately every 5 years for inflation based on the Personal Consumption Expenditures Chain-Type Price Index (most recent adjustment effective June 29, 2026).
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 $3.1 million, net worth of $2.9 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 $1.4 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 $1.4M" 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 $2.9M net worth excluding primary residence, which exceeds (is "in excess of") the $2.7M 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. Without meeting a dollar test, only executive officers, directors, trustees and general partners of the adviser, and employees who participate in its investment activities and have performed those or substantially similar duties, for the adviser or another company, for at least 12 months, qualify. 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 $1.4M 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 $1.4M), net worth (in excess of $2.7M), executive officer or director status, investment-active employee 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.
What concepts relate to Qualified Client?
This term is part of these clusters :
Where does Qualified Client appear on the Series 65 exam?
This term is tested in the following Series 65 exam topics: