Performance Guarantees Prohibition

The Blanket Prohibition

State rules prohibit guaranteeing a client that a specific result will be achieved (gain or no loss) with advice that will be rendered. Investment Advisers Act of 1940 (IAA) Section 206 antifraud provisions also prohibit performance guarantees as fraudulent conduct.

This prohibition applies to all investment advisers, investment adviser representatives (IARs), and federal covered advisers.

What is prohibited:

  • Guaranteeing any specific rate of return ("I guarantee 10% annually")
  • Guaranteeing that a client will not lose money ("You won't lose a dime")
  • Promising that an investment strategy will achieve a particular outcome
  • Guaranteeing performance results of any kind

This prohibition applies:

  • Regardless of how the guarantee is worded
  • Regardless of whether the client requests or demands it

There is no "client requested it" exception. Even if a client says, "Just promise me I won't lose money," a securities professional must refuse.

Think of it this way: No one can predict the future. Markets carry inherent risk, and any promise that removes that risk from a client's mind is misleading. A guarantee shifts the risk onto the professional, which distorts the client's decision-making and violates securities law.

Exam Tip: Gotchas

  • A guarantee to break even is still a performance guarantee. It promises a specific minimum outcome (zero loss). This is frequently tested.
  • "The client asked me to guarantee it" is never a valid defense. The prohibition is absolute.

What IS Permitted

Not everything related to performance is off-limits:

  • Discussing historical performance (subject to advertising rules)
  • Providing reasonable projections or illustrations with appropriate disclaimers
  • Explaining how an investment has performed in the past, with disclosure that past performance does not guarantee future results
  • Offering a money-back guarantee on advisory fees - this is not a guarantee of investment performance

The prohibition is on guaranteeing investment results, not on guaranteeing service quality. An adviser may offer to refund advisory fees if the client is dissatisfied, but may never guarantee that an investment will produce a gain or avoid a loss.

Exam Tip: Gotchas

  • Even a statement like "you can't lose with this strategy" violates the rule.
  • A fee refund guarantee is permitted because it relates to service quality, not investment outcomes.