NASAA Series 63Communication with Customers and ProspectsMedium
An agent of a broker-dealer is discussing a new investment product with a client. The agent explains the potential benefits and risks. The client then asks, 'If I invest, how much money will I definitely make?' Which of the following responses by the agent would be most appropriate and compliant with the Uniform Securities Act?
- A“You can expect a solid return, but the exact amount depends on market conditions.”
- B“While we can't guarantee, similar clients have seen returns of 8-12% recently.”
- C“I cannot guarantee any specific returns; all investments carry risk, and past performance does not guarantee future results.”
- D“Based on our projections, you should make at least 10% in the first year.”
Show answer & explanationAnswer & explanation
Correct answer: C. “I cannot guarantee any specific returns; all investments carry risk, and past performance does not guarantee future results.”
Agents are strictly prohibited from guaranteeing specific returns or implying certainty of investment performance. The most appropriate and compliant response is to explicitly state that returns cannot be guaranteed and to remind the client of investment risks and the disclaimer about past performance.
Why the other options are wrong
- A. The phrase 'expect a solid return' is still misleading as it implies a level of certainty not permissible for investments.
- B. While not a direct guarantee, citing 'similar clients' returns can still be misleading by implying expected future performance.
- D. This implies a guarantee or highly probable return, which is prohibited.
Prohibition Against Guaranteeing Returns
Under the Uniform Securities Act, agents and investment advisers cannot guarantee specific returns, promise to make a profit, or guarantee against loss for any investment product.
- No specific return guarantees.
- No guarantees against loss.
- Must disclose investment risks.
- Past performance not indicative of future results.
Memory trick: Ethical communication builds trust, like a strong handshake.