NASAA Series 63Communication with Customers and ProspectsMedium
An investment adviser representative (IAR) is preparing a seminar for prospective clients. During the presentation, the IAR plans to discuss a specific investment strategy that has historically generated above-average returns. Which of the following statements must the IAR include in the presentation regarding past performance?
- AAn assurance that the strategy is approved by the state Administrator.
- BA disclosure that past performance is not indicative of future results and that losses are possible.
- CA claim that the strategy is 'risk-free' due to its long track record of success.
- DA guarantee that similar returns will be achieved in the future due to the strategy's consistency.
Show answer & explanationAnswer & explanation
Correct answer: B. A disclosure that past performance is not indicative of future results and that losses are possible.
When discussing past performance, especially in a promotional context, investment adviser representatives are required to include a prominent disclosure that past performance is not indicative of future results. They must also clarify that investments carry risks, and losses are possible. Guarantees or claims of 'risk-free' investments are strictly prohibited.
Why the other options are wrong
- A. Stating approval by a regulator is prohibited and implies endorsement, which regulators do not provide.
- C. 'Risk-free' claims are prohibited as all investments carry some level of risk.
- D. Guarantees of future returns are prohibited and considered fraudulent.
Past Performance Disclosure
When discussing historical investment performance, a prominent disclosure stating that past results do not guarantee future returns and that risks/losses are possible is required.
- Applies to all advertisements, presentations, and promotional materials.
- Aims to prevent misleading investors.
- Prohibits performance guarantees or 'risk-free' claims.
Memory trick: History's Lessons, Future's Warnings.