What Baseball Can Teach Us About Investment Performance Advertising

by Baker Donelson

Baker Donelson

Spring is here! That means it's baseball time and a new season for fans to obsess over their favorite teams and players. Baseball statistics define the game. Just think of batting averages, slugging percentages, OPS, gross production averages, and walk-to-strikeout ratios. The game is measured moment by moment, with the greatest of moments recalled by quoting statistics for generations to come.

If baseball had a professional doppelgänger, a twin living a secret life, it would be professional investment financial advising. No other profession's performance is more statistically measured, followed on a yearly, quarterly, monthly, daily and moment by moment basis. Statistical performance is a natural key differentiator among investment advisers. Successful advisers want to tout positive performance to their clients and prospects, while the investing public wants a scorecard to decide which adviser to engage. However, just as baseball has a set of rules that defines how statistics are kept for teams and individual players, the investment advisory world has a set of rules that investment advisers are required to follow in touting their investment successes.

Section 206 of the Investment Advisers Act of 1940, as amended (the "Advisers Act") makes it illegal for any investment adviser to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Advisers Act gives the Securities and Exchange Commission (SEC) the authority to adopt rules to define and prescribe means to prevent fraud. The SEC has adopted 17 CFR 275.206(4)-1, the investment adviser advertising rule (the "Advertising Rule"), defining the type of advertising practices the SEC views as fraudulent, and therefore impermissible for advisers in promoting their services to the public.

Like baseball statistics, which are today found easily on the Internet and not just in dusty arcane statistics books, a person can likewise easily find investment performance statistics. The Advertising Rule applies to all types of communications with the public, including in-person meetings, mailings, emails, websites and all other aspects of written promotion of performance. The SEC views the use of model or actual results in a written communication (i.e., an advertisement) as false or misleading if it implies, or the reader would infer from it, something about the adviser's competence or about future investment results that would not be true had the advertisement included all material facts. Where are the risks?

  1. One-to-one presentations are advertisements. Written materials provided to clients and prospective clients constitute advertisements. All written statistics touting investment performance need to tell the entire story and the numbers must be verified as accurate.
  2. Touting only home-runs violates the Advertising Rule. The Advertising Rule allows investment advisers to disclose their investment performance. However, only promoting the home runs (great stock picks) without attribution to actual results is a violation of the Advertising Rule. If investment results are shared, the adviser must either include or offer to furnish a list of all recommendations made by the adviser within the immediately preceding period of not less than one year. The list must (i) state the name of each security recommended, the date and nature of each such recommendation (e.g., whether to buy, sell or hold), the market price at that time, the price at which the recommendation was to be acted upon, and the market price of each such security as of the most recent practicable date, and (ii) contain the following cautionary legend on the first page thereof in print or type as large as the largest print or type used in the body or text thereof: "it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list."
  3. Returns must be net of fees, commissions and expenses. Presenting results without fees is misleading under the Advertising Rule. An advertisement that includes results which do not reflect the deduction of advisory fees, brokerage or other commissions, and any other expenses a client would have paid or actually paid may be misleading. In addition, any representation regarding relationships with investment managers must be accurate, including any representation regarding gifts or commissions received by the adviser.
  4. Performance Results. Often performance results are compared to benchmarks of performance. If advertising materials compare to benchmarks, these materials need to have disclosures regarding the material limitations of any comparisons. These disclosures may include asset allocation, differing investment strategy, hypotheticals versus real world performance and back-tested performance data.

As an attorney, I view the risks of touting investment performance in the realm of how a plaintiff's attorney would proceed with a lawsuit on behalf of a disgruntled investor. The areas for examination in a civil action based upon fraudulent inducement and misleading advertisement are expansive. In a cross-examination of an investment adviser in a civil action for deceptive or fraudulent inducement, you can count on the plaintiff's lawyer asking the following:

Did you provide the following advertising materials?

Do these advertising materials demonstrate all of your investment recommendations or only the top performing investments?

Are these advertising materials demonstrating performance inclusive of fees, commissions and expenses?

The advertising materials represent compliance with performance standards (Global Investment Performance Standards (GIPS®)). Is that true and accurate? Explain all of the criteria used to show compliance with GIPS.

Were your advertising materials transparent and accurate as to performance to induce my client to trust you with their investment management?

While you enjoy baseball season and follow your favorite team and players, think about how you keep the performance statistics top of mind. Your clients do the same when looking to your investment performance. It is critical that the statistics you choose to share with your clients tell the whole story. Investment advising is a performance-based business, but it is also a relationship profession. Advertise with the relationship in mind.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Baker Donelson | Attorney Advertising

Written by:

Baker Donelson

Baker Donelson on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.