Which of the following best describes clients eligible for performance fees?

Clients eligible for performance fees are best described as qualified clients with significant investment assets. This classification is grounded in regulatory standards designed to ensure that only those investors with a certain level of sophistication and financial capacity are subjected to performance-based fees.

Qualified clients typically have a high net worth or a substantial amount of their own investable assets. This requirement is in place because performance fees, which are often charged as a percentage of the profits generated by the adviser, may pose a higher risk to clients who lack adequate financial resources or investment experience.

The regulatory framework aims to protect less experienced or less wealthy investors from engaging in potentially high-risk financial arrangements, where performance fees could incentivize advisers to take excessive risks to achieve higher returns. By restricting performance fees to qualified clients, the system ensures that those who enter into such arrangements are better equipped to understand and handle the associated complexities and risks.