Performance Guarantees Prohibition

Lesson

Investment advisers must not make false promises or mislead clients about the potential returns on their investments, particularly providing "guaranteed" investment returns or "guaranteed" limited loss.

Practice Question #1

Which of the following is considered a performance guarantee?

A) Promising a client a specific return on their investment

B) Providing historical returns of an investment

C) Discussing the potential risks associated with an investment

D) Recommending an investment based on a client's risk tolerance

Select an option above to see an explanation here.

A) Promising a specific return on investment is considered a performance guarantee and is prohibited by law. B) Providing historical returns is allowed but should not be used to guarantee future performance. C) Discussing potential risks is part of the disclosure process and is not a performance guarantee. D) Recommending an investment based on risk tolerance is part of the suitability process and is not a performance guarantee.

Terms

Performance guarantees:: Promises made by investment advisers about the potential returns on an investment, which are prohibited by law.
Misleading communication:: Providing false or inaccurate information to clients or prospects can lead to legal consequences.

Practice Question #2

What is the primary reason for the prohibition of performance guarantees?

A) To protect investment advisers from legal liability

B) To ensure that clients make informed decisions about their investments

C) To prevent investment advisers from making false promises or misleading clients

D) To encourage investment advisers to focus on long-term investment strategies

Select an option above to see an explanation here.

A) While avoiding legal liability is important, the primary reason for the prohibition is to prevent false promises and misleading clients. B) Ensuring clients make informed decisions is important, but the primary reason for the prohibition is to prevent false promises and misleading clients. C) Preventing false promises and misleading clients is the primary reason for prohibiting performance guarantees. D) Encouraging long-term investment strategies is a positive outcome, but the primary reason for the prohibition is to prevent false promises and misleading clients.

Do Not Confuse With

Risk disclosure:: Providing information about the potential risks associated with an investment, which is different from making performance guarantees.
Advertising:: Promoting investment products and services must also adhere to regulations and avoid performance guarantees.
Past performance:: Information about an investment's historical returns, which can be provided to clients but should not be used as a guarantee of future performance.

Practice Question #3

Which of the following is a prohibited action when communicating with clients and prospects?

A) Guaranteeing a specific return on an investment

B) Providing information about the historical performance of an investment

C) Discussing the potential risks associated with an investment

D) Recommending an investment based on a client's financial goals

Select an option above to see an explanation here.

A) Guaranteeing a specific return on an investment is a prohibited performance guarantee. B) Providing information about the historical performance of an investment is allowed and is not a prohibited action. C) Discussing the potential risks associated with an investment is part of the disclosure process and is not a prohibited action. D) Recommending an investment based on a client's financial goals is part of the suitability process and is not a prohibited action.

Historical Example

In the past, some investment advisers would make performance guarantees to attract clients, promising high investment returns. This led to many clients losing money when the investments did not perform as promised, resulting in stricter regulations and the prohibition of performance guarantees.