Wed. Dec 8th, 2021

Based on 2020 net worth, we estimate that 6,398,420 American households, or 4.97% of all households, were qualified customers. Almost half (~ 46.8%) of all accredited investor households were also households of qualified clients.

In addition, they controlled the homes of qualified customers $ 62.0 trillion in wealth. According to the 2019 SCF, this translates into 64.5% of all private household wealth in the United States i 84.5% of the wealth of accredited investors.

Our estimates come from the 2019 Federal Reserve Consumer Finance Survey and 9% of the results of the survey reached the middle of the pandemic (until approximately April 2020).

What is a qualified customer?

Qualified customers are a special class of investors defined by the Investment Advisors Act of 1940. The most common criterion for rating is to exceed the net worth of $ 2.1 million – no including equity in your primary residence.

Most importantly, qualified customers performance-based commissions may be charged.

Qualified customer criteria (and inflation adjustment)

Rule 205-3 of the Investment Advisory Act of 1940 sets out the criteria for being a qualified client. While this publication estimates generic qualified client households (based on the equity threshold), there are a few other ways to qualify that depend on the advisor or fund:

  • You have a net worth (including joint maintenance with a spouse) of more than $ 2,000,000 *
    • You cannot count the net worth of your main home in calculating its net worth: only assets minus all liabilities, away from home. If you are a submarine, that is, you owe more to your home than you are worth, you need to subtract the difference.
  • (o) You will have $ 1,000,000 * invested with the advisor after you invest
  • (o) you are an executive, partner or similar of the advisor
  • (o) If you are not an employee of the advisor

In the tool, the methodology is identical to my methodology for determining accredited investors, except with a net worth of $ 2.1 million of ex-principal equity as a cut.

* The SEC periodically adjusts these values ​​for inflation. As of 2016, you needed a net worth of $ 2.1 million to be a qualified customer. The SEC expects to raise the threshold to $ 2.2 million in equity or $ 1.1 million in assets under management in the late summer of 2021.

Performance fees

Performance fees come in a variety of forms. Bring or interest brought is a common example of venture capital return commission, Angel, Hedge Funds and PE Funds, often known as to promote in real estate funds.

Although tariff structures differ, a widespread agreement is known as “2-and-20”. Here, a fund will charge an annual commission of 2% on managed assets and 20% bring or to promote above a certain threshold, reference point or obstacle. For example, this performance fee may be charged as a percentage of total return on the returns of an index, the interest rate benchmark, or returns after returning all original capital.

Seriously, though, the arrangements are incredibly varied, unique, and creative. Although 2 and 20 is the most common arrangement, funds have all sorts of different hurdles and some have different levels of payments (in real estate syndication, it is commonly known as waterfall). The enumeration of all forms is beyond the scope of the article; all I can say is make sure you model your schedule, returns, and potential scenarios and know what can happen before you invest.

Qualified customers and accredited investors

While being an accredited investor opens up many investment opportunities, you will need to be a qualified client to be able to join many funds. Since the interest brought is common in various private equity funds, reaching the equity threshold to be a qualified client is where a larger universe of private investment options opens up. Other funds take it a step further, requiring you to be a qualified buyer who releases them to raise investment money from more than 100 investors without further disclosure requirements.

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