IA Compensation Restrictions
Chapters in this video
- 0:00 The Ian and Clara scenario: why performance fees create reckless risk
- 0:52 The performance fee ban: "shall not" language in writing
- 2:07 Allowed fees: hourly, flat, and AUM, then the fulcrum fee seesaw
- 3:33 True performance fee exemptions: qualified client thresholds
- 5:18 Mandatory refund and discretionary authority in writing
- 6:20 Assignment requires consent, partnership changes require notice
- 7:17 Rapid-fire exam recap: Stan the administrator's three-step flow
What this video covers
- The exact written contract language that bans performance-based compensation: "shall not" be compensated on a share of capital gains or capital appreciation
- Why a large fee is not automatically prohibited, but a fee formula pegged to investment gains is
- The three permitted compensation structures: hourly fees, flat or fixed fees, and assets under management (AUM) fees
- What a fulcrum fee is, why it is based on total value averaged over a definite period, and how the two-way movement distinguishes it from a prohibited one-way performance fee
- The two qualified client dollar thresholds ($1,400,000 in AUM with the adviser, or $2,700,000 net worth excluding primary residence) and why qualified client status alone does not complete the exemption
- The written disclosure requirements for performance-fee mechanics when the adviser is registered, and the separate exemption for advisers not required to register
- Why assignment of an advisory contract requires prior client consent, while partnership membership changes only require notice within a reasonable time after the change
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