Standard III(D) Performance Presentation

Standard III(D) requires members and candidates to provide credible performance information to clients and prospective clients and to avoid misstating performance or misleading clients and prospective clients about the investment performance of members or candidates or their firms. This standard encourages full disclosure of investment performance data to clients and prospective clients.

Standard III(D) covers any practice that would lead to misrepresentation of a member’s or candidate’s performance record, whether the practice involves performance presentation or performance measurement. This standard prohibits misrepresentations of past performance or expected performance. A member or candidate must give a fair and complete presentation of performance information whenever communicating data with respect to the performance history of individual accounts, composites, or groups of accounts.

The requirements of this standard are not limited to members and candidates managing separate accounts. Whenever a member or candidate provides performance information for which the manager is claiming responsibility, such as for pooled funds, the history must be accurate. Research analysts promoting the success or accuracy of their recommendations must ensure that their claims are fair, accurate, and complete.

If the presentation is brief, the member or candidate must make available to clients and prospects, on request, the detailed information supporting that communication. Best practice dictates that brief presentations include a reference to the limited nature of the information provided.

For members and candidates who are showing the performance history of the assets they manage, compliance with the GIPS standards is the best method to meet their obligations under Standard III(D). Members and candidates should encourage their firms to comply with the GIPS standards. Members and candidates whose firms do not comply with the GIPS standards can meet their obligations under Standard III(D) to present fair, accurate, and complete investment performance history by, among other things,

• considering the knowledge and sophistication of the audience to whom a performance presentation is addressed when determining what information to provide and tailoring it accordingly,
• presenting the performance of a composite of similar portfolios rather than using a single representative account,
• including terminated accounts as part of any composite performance history,
• including disclosures that fully explain the performance results being reported (for example, stating, when appropriate, that results are simulated when model results are used; clearly indicating when the performance record is that of a prior entity; or disclosing whether the performance is gross of fees, net of fees, or after tax), and
• maintaining the data and records used to calculate the performance being presented.

Taylor of Taylor Trust Company distributes a brochure to potential clients stating that the firm consistently achieves “25% annual growth” of assets. Taylor Trust’s common trust fund did increase 25% for the previous year, which mirrored the increase of the overall market. The fund never had an annual growth rate of 25% prior to last year, and the average rate of growth of all of Taylor Trust accounts for five years is 5% per year.

Judd, a senior partner at Alexander Capital Management, circulates a performance report for the capital appreciation accounts for the years 2008 through 2022. The firm claims compliance with the GIPS standards. Returns are not calculated in accordance with the requirements of the GIPS standards, however, because the composite returns are not calculated by asset weighting portfolio returns.

McCoy is vice president and managing partner of the equity investment group of Mastermind Financial Advisers, a new business. Mastermind recruited McCoy because he had a proven six-year track record with G&P Financial. In developing Mastermind’s advertising and marketing campaign, McCoy prepares an advertisement that includes the equity investment performance he achieved at G&P Financial. The advertisement for Mastermind does not identify the equity performance as being earned while at G&P. The advertisement is distributed to existing clients and prospective clients of Mastermind.

Davis developed a mutual fund selection product based on historical information from 2000 to 2015. Davis tests his methodology by applying it retroactively to data from the 2016–22 period, thus producing simulated performance results for those years. In January 2023, Davis’s employer decides to offer the product and Davis begins promoting it through trade journal advertisements and direct dissemination to clients. The advertisements include the performance results for the 2016–22 period but do not indicate that the results were simulated.

In a presentation prepared for prospective clients, Kilmer shows the rates of return realized over a five-year period by a “composite” of his firm’s discretionary accounts that have a “balanced” objective. This composite, however, consists of only a few of the accounts that met the balanced criterion set by the firm, excludes accounts under a certain asset level without disclosing the fact of their exclusion, and includes accounts that do not have the balanced mandate, because those accounts help increase the investment results. In addition, to achieve better results, Kilmer manipulates the narrow range of accounts included in the composite by changing the accounts that make up the composite over time.

Purell is reviewing the quarterly performance attribution reports for distribution to clients. Purell works for an investment management firm with a bottom-up, fundamentals-driven investment process that seeks to add value through stock selection. The attribution methodology compares each stock’s return with its sector return. The attribution report indicates that the value added this quarter came from asset allocation and that stock selection contributed negatively to the calculated return.

After trying several different approaches, Purell discovers that calculating attribution by comparing each stock with its industry and then rolling the effect to the sector level improves the appearance of the manager’s stock selection activities. Because the firm defines the attribution terms and the results better reflect the stated strategy, Purell recommends that the client reports should use the revised methodology.

While developing a new reporting package for existing clients, Singh, a performance analyst, discovers that her company’s new system automatically calculates both time-weighted and money-weighted returns. She asks the head of client services and retention which return type is preferred given that the firm has various investment strategies that include bonds, equities, securities without leverage, and alternatives. Singh is told not to label the returns so that the firm may show whichever performance calculation provides the highest return for the period.