By Phil West, WCI ContributorWhat is a “qualified client?” In short, it’s an investor who has achieved a certain tier of wealth and can access more investment opportunities than other investors. As we've previously pointed out, “Most of the private real estate investment deals out there have a promote structure, and thus, you must be an accredited investor and a qualified client.” Let's review what defines a qualified client and how the definition was established.
Defining a Qualified Client
Our understanding of what a qualified is client dates back to a quartet of Great Depression rules, and the current definition is laid out by the US Securities and Exchange Commission (SEC). The thresholds listed below are due to be revisited by the SEC in May 2026 according to its advisory.
- $2.2 million investable assets (increased from $2 million in 2016 and $2.1 million in 2021) OR
- $1.1 million invested with that advisor (increased from $1 million in 2021) OR
- A “qualified purchaser” OR
- An officer or director of the fund manager or an employee who participates in the investment activities of the investment advisor.
Defining an Accredited Investor
It's also important to be aware of a similar yet different class of investors known as accredited investors. We tackled this definition in a separate article, at first joking (yet with some serious undertones) that it’s a wealthy person “who should know better than to invest in anything that requires you to be an accredited investor in order to invest in it.”
It’s a broader definition where more high earners could potentially fit.
- Income over $200,000 ($300,000 together with a spouse) in both of the last two years and a reasonable expectation of the same income this year
- Net worth (with spouse) excluding primary residence of $1 million
- A bank, insurance company, registered investment company, etc.
- Charity, corporation, or partnership with more than $5 million in assets
- An employee benefit plan with more than $5 million in assets where a registered investment adviser makes the investment decisions
- A trust with more than $5 million in assets where a “sophisticated person” makes the investment decisions.
- A business entirely owned by accredited investors
- A director, executive officer, or partner of the firm selling the securities
Usually, a qualified client would also be an accredited investor, but the opposite is not necessarily true.
More information here:
10 Things to Know Prior to Purchasing an ‘Accredited Investor' Investment
How a Moderate Income Physician Should Think About Being an Accredited Investor
How We Got to These Classifications
The Securities Act of 1933, aka as the “truth in securities” law, has two principal aims:
- Require that investors receive financial and other significant information concerning securities being offered for public sale; and
- Prohibit deceit, misrepresentations, and other fraud in the sale of securities.
This law brings us to the concept of the accredited investor, which doesn’t have to jump through the same registration process for investments that most people do.
From there, the Trust Indenture Act of 1939 oversees the sale of bonds to investors. The Investment Company Act of 1940 laid the foundation for mutual funds as we know them. And finally, the Investment Advisers Act of 1940 brings us the term “qualified client.” The law requires that advisors function as fiduciaries and prohibits them in many respects from charging performance-based fees. It spells out that an advisor can only charge a performance-based fee to a “qualified client”—something that aligns the interest of the investor and the person or people managing that investment.
As noted by Wealth Management, performance-based fees don’t necessarily guarantee that an investor is going to get more from the manager. That article notes, “A 2003 study in the Journal of Finance found that funds with performance fees returned on average 1 percentage point a year more than funds without them,” in part because of the risk managers are willing to take on. But it also says, “Recent data, however, shows a slight edge for funds with incentive fees.”
It also points out, “Ultimately, one of the biggest flaws in the performance-fee model is that the rewards and costs are not always shared equitably among original investors, new investors, and management.”
The intention of the qualified client designation is to give a heads up to investors. As the Motley Fool put it, “Since qualified clients have an additional layer of investor protection removed (they can be assessed performance-based fees), the SEC wants to make sure they know what they're getting into, or at least can afford to absorb a loss.”
More information here:
How to Succeed in Private Real Estate Investing
The Bottom Line
A cynical way of putting it might be to say that qualified client investors have a wider range of ways in which they can potentially lose money. But on the flip side, investors with that designation have more opportunities to invest and make money—including solid plays like private real estate lending funds, which may require investors to be qualified clients before they can buy in.
If you are interested in private real estate investing opportunities, start your due diligence with those who support The White Coat Investor site:
Featured Real Estate Partners
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