What are "performance fees" and who can they be charged to?

Performance fees are compensation structures for investment advisers that are contingent upon the investment performance they achieve for their clients. Specifically, these fees are typically calculated as a percentage of the investment profits generated over a specified benchmark or a predetermined rate of return. The reasoning behind performance fees is to align the interests of the adviser with those of the client, thereby motivating the adviser to enhance portfolio performance.

These fees can only be charged to qualified clients, who generally meet certain criteria related to their financial status, experience in investing, and understanding of risk. The rationale for this restriction is to protect less experienced or less financially resourced investors from the potential risks associated with performance fee agreements, which can incentivize excessive risk-taking by advisers.

In this context, the chosen answer reflects an accurate understanding of both what performance fees are and the specific regulatory framework governing who can be charged such fees.