Subject 10. Standard III (D) Performance Presentation

III. DUTIES TO CLIENTS

D. Performance Presentation.

When communicating investment performance information, Members and Candidates must make reasonable efforts to make sure that this information is fair, accurate, and complete.

In the past there have been several practices that have hindered performance presentation and comparability, such as:

  • Representative accounts - only the best results are presented.
  • Survivorship bias - accounts that have been terminated are excluded from the results presented.
  • Portability of investment results - results from previous employment are disclosed.
  • Varying time periods - only the results for the good time periods are reflected.

A firm cannot claim that they are/were in compliance with CFA Institute's standards unless they comply in all material respects with CFA Institute's standards.

Procedures for compliance

Misrepresentations about the investment performance of the firm can be avoided if the member maintains data about the firm's investments performance in written form and understands the classes of investments or accounts to which those data apply and the risks and limitations inherent in using such data. In analyzing information about the firm's investment performance, the member should ask the following questions:

  • How many years of past performance does this information reflect?
  • Does it reflect performance for the prior year only, after several years of poor performance, or an average of several years of performance?
  • Has the performance been measured in accordance with CFA Institute's standards?
  • Does investment performance vary widely among different classes of funds or accounts? If so, the member must describe investment performance by classes rather than by an overall average figure and accurately explain what the performance figures represent.

Example

Your bond fund has generated a below average performance for four of the past five years. You use this as the basis for expectations of an above-average performance for the upcoming year. If your average or expected performance is properly determined, you should have a 50% probability of meeting or exceeding that average. Thus, it is inappropriate to declare that because performance was below average last year it is likely to be above average next year.

User Contributed Comments 2

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sgossett86: RSVP
raffrobb: Good example. Nice counter logic to probabilistic optimism.