The model for how NOT to report past performance to prospective clients

In this past weekend's WSJ, Jason Zweig once again provided fodder for our use. In "Protecting Your Bucket," he describes the practices of RJL Wealth Management, who provides investors with hypothetical performance. The SEC appears to have some issues with this performance, given some of the assumptions underlying the results. For example, a 3% annual inflation rate is used for the entire period shown, even though in reality it was closer to 7 percent. Disclosures were included with the materials that indicate that the assumed inflation rate was lower than it was in reality, but it's unclear that the SEC buys this.

Zweig provides additional details regarding this investor and concludes by writing "No matter how charismatic a financial adviser is, you can't earn 'hypothetical' results. Always ask for data on how actual investments performed." Furthermore, "Whenever an adviser cites a benchmark, ask for proof that it measures assets that are comparable to what you would be buying."

The Universal Advisor Performance Standards (UAPS) may use this piece as an example of things not to do, as well as things to do.

p.s., Here's a link to the settlement discussed in Jason Zweig's article. You may also be interested in the recent proceeding involving Jason A. D’Amato (President of Stanford Capital Management) on performance advertising issues. Thanks to Steve Stone of Morgan, Lewis & Bockius LLP for providing these.