SEC private-access plan puts performance fees front and center

The Securities and Exchange Commission is preparing a proposal, reported by Bloomberg and carried by Private Equity Wire, that would widen retail investors' access to private markets and allow investment advisers to charge performance-based fees to a broader range of clients. The two provisions read naturally as one deregulatory package, but they strike RIAs at different levels: one expands what clients can buy, the other changes how advisers are paid for selling it.

For independent firms, the performance-fee leg is the sharper development, because broadening who can be charged performance-based compensation rewrites the economics of an advisory relationship and, unlike an access door, touches agreements already in force once those clients become newly eligible. A firm that opts in will need revised contracts, fresh disclosures, and a defensible rationale for adding a second layer of compensation on portfolios that already carry their own fees and illiquidity. That rationale will be tested in the compliance file and in the client meeting; an RIA principal who cannot state it plainly should not put it in a contract. Advisers who keep asset-based fees face less paperwork but still have to explain why they are leaving new fee flexibility on the table.

The access leg is familiar ground, and the redemption scare at Partners Group was a reminder of a point this publication has been making: the gateway battle has moved from access to liquidity and fee transparency, and a retail expansion pushes that fight down-market, where investors have fewer tools to evaluate lockups and semi-liquid structures. Smaller accounts, in particular, cannot diversify across enough vintages to blunt the damage of a single stuck position, so the adviser's job shifts from product selection to position sizing and redemption planning. Those who place retail money in private-market vehicles will be selling liquidity terms as much as returns.

The practical work does not need to wait for rule text: whatever thresholds the SEC eventually writes, RIAs should run the scenario against their own fee schedules now — which clients would become newly eligible, how an incentive-fee relationship would be documented under the firm's fiduciary standard, and what the firm would say to a client who holds an illiquid position alongside an incentive fee. This is an administrative exercise before it is a product opportunity. The firms best positioned when the package lands will be those whose fee and liquidity language was already drafted for the scrutiny that wider retail distribution brings.