Invest3 publishers3 min readPublished Updated
SEC proposals give advisors more room to take a share of client capital gains
SEC proposals approved Wednesday would give registered investment advisors much more room to charge performance fees on capital gains in client accounts. Interval-fund changes and a credential route to accredited status widen what retail clients can buy, and the fee rule changes how advisors get paid for it.
The Investor · Invest desk
What happened
- The SEC also approved notices that it is considering making credentials such as CFP status and Finra licenses enough to qualify holders as accredited investors.
- Investment Management director Brian Daly said the agency wants private sponsors to offer more alternative strategies to retail investors and regulated funds.
- The vote follows May moves under Chair Paul Atkins, including a proposal to allow semiannual company reports and a signal that climate-disclosure rules would be rescinded.
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Why it matters
- cost Performance fees under the proposal would be paid from client capital gains, while the Schwab finding cited alongside it measures only firm revenue and client counts.
- exposure An advisor paid a share of client gains would also be the person choosing which private-market funds those clients buy, so pay and product selection sit with one party.
- contradiction The coverage calls the credential measure a proposal naming CFP, CFA and CPA in one place and a notice naming CFP and Finra licenses in another, so any eligibility planning rests on an unfixed list.
The fee proposal is the one that reaches an advisor's revenue soonest, because it ties pay to capital gains in the client's own account [1]. The fee comes out of the client's gain, so the advisor's income moves with the portfolio [1]. Brian Daly, director of the Division of Investment Management, said such pay aligns client and advisor priorities and can evolve to help curb "excessive risk-taking" [4].
The Daily Upside notes the vote came less than a year after a Schwab report found that firms with performance pay generated more long-term revenue and served more clients [3]. Both findings are about the firm: its revenue and its client count [3]. The report on the proposal does not say whether an advisor would have to recover a client's losses before charging on later gains [1].
Daly's wider case was about access. "Private market exposure is sought out and accessed by nearly every pension fund, every university endowment, every high-net-worth family office, and every other category of institutional investor," he said [11]. The interval-fund proposal is how retail investors would get that exposure, and its terms favor different parties [5]. Monthly repurchase intervals give holders more frequent exits. A longer deferral of the first repurchase offer gives the sponsor more time with new money before anyone can ask for it back [5]. Closed-end funds could also issue multiple share classes [5].
Commissioner Mark Uyeda anticipated critics who would call the package "a gift to shady financial product sponsors" [7]. His reply was a definition. "Interval structures provide periodic liquidity; they are not a promise of frequent redemption," he said [6].
Client eligibility is the least settled of the three measures. The Daily Upside's opening describes a separate proposal covering designations like the CFP, CFA and CPA [2]. Its later account describes notices that the SEC is considering credentials such as CFP status and Finra licenses [8]. Between them the two passages name four kinds of credential, and the CFP is the only one in both [1]. Jim Moloney, director of the Division of Corporation Finance, spoke in the conditional. "If the commission were to finalize these designations," he said, the result would be "additional non-financial pathways for investors to demonstrate their sophistication" [9].
The package can go roughly three ways from here [1][5][8]. The commission could adopt it close to the draft, and fee schedules get repriced first. The interval-fund terms could survive while the fee latitude is narrowed. Or the fee and fund rules could move while the credential route stays at the notice stage.
I think the fee proposal is the one advisory firms should model now. Of the three measures, it is the only one that changes what a firm earns from clients it already has [1]. Building new eligibility checks around credentials the SEC has only said it is considering would mean spending ahead of a rule [8]. That view is wrong if the notices become a formal proposal with a fixed credential list before the fee rule is adopted, or if the adopted fee rule gives advisors far less room than the proposal does [1].
What to watch
- Whether the credential notices become a formal proposal, and whether the CFA and CPA sit on the final list beside CFP status and Finra licenses.
- Whether the adopted fee rule requires advisors to recover client losses before charging a performance fee on later gains.
- How long the extended deferral of first repurchase offers runs in any final interval-fund rule.