The SEC has decided that its efforts to eliminate performance fees for all but truly high-net-worth investors were a little ambitious.
Buried in the final rule is an exemption allowing advisors who were charging clients with $1.5 million to $2 million a percentage of their portfolio returns to go on doing so.
The performance fee structure, most commonly associated with hedge funds, is normally reserved for wealthy clients who are investing enough money for the added cost to make economic sense.
Previously, the fees were limited to clients with over $1.5 million in net worth or $750,000 managed by the advisor charging the fee.
The new SEC rules unveiled in July raised the floor to $2 million in all or $1 million under the advisor's management and eliminated the value of the client's home from the calculations.
However, nothing was said about "grandfathering" clients who fall between the old floor and the new one.
Letting advisors keep charging a performance fee on these accounts is curious.
Performance-based programs that target these investors -- we could call them the "low-high-net-worth" -- may go a little hungry as the pool of potential clients shrinks, but they won't exactly starve.
Granted, this will eliminate hardship for performance-driven advisors in the here and now, but is that the SEC's real mission?
If these fees are unsuitable for these clients, why trap those already in such arrangements into going on paying?
And if they're not such a big deal after all, that needs to be addressed as well.