Broker-Dealers Can Finally Show Performance Projections

The future is unwritten, but broker-dealers might have a pretty good idea about it.

They will be allowed to include performance projections and return targets for investment strategies in their communications with investors, per a FINRA rule change approved earlier this month by the Securities and Exchange Commission. The move brings BDs more in line with registered investment advisors, which have been able to use hypothetical performance in their marketing under the SEC’s Marketing Rule.

“The SEC acknowledges that RIAs are out there hawking hypothetical performance under the Marketing Rule,” said Bill Singer, a longtime securities lawyer. “That strikes the SEC as the imposition of a regulatory handicap on BDs.”

Do’s and Don’ts 

The change updates FINRA’s rules governing communications, but it doesn’t mean firms can start plastering projected returns on billboards or putting them in TV commercials. There are guardrails:

• Firms must adopt and implement written policies defining the types of investors who have the knowledge and resources to evaluate performance projections and return targets. FINRA has said the demand for such projections largely comes from institutional and other sophisticated investors.
• Broad, untargeted advertising is unlikely to be appropriate. However, if the figures are included in a presentation to a specific client or in an email to a defined group of sophisticated clients, that probably would fly.

Follow the Rules. BDs may be quick to take advantage of the change, said Michael Durette, managing principal at financial consultant CRC Oyster. “Talking about how a strategy has done in the past is great, but there’s always a disclosure that says past performance is not indicative of future results,” he told Advisor Upside. Leading marketing materials with performance figures could be a big pitfall, he said. “Framing it correctly and making sure that risk disclosures and performance numbers are accurate is important.”

Projections can show a strategy’s potential but also create unrealistic expectations. “The danger in all of this is that a projection can start to feel like a promise,” said Mark Stancato, founder of VIP Wealth Advisors. “The more precise the number looks, the easier it is for investors to forget how much uncertainty sits underneath it.”