What Are Performance Disclosures?

If you’ve ever heard the saying “Past performance is no guarantee of future results,” then you’ve heard a performance disclosure. But performance disclosures don’t just cover a broker’s rear end – they provide investors with crucial information.

Performance disclosures, explained

A performance disclosure is a legal disclosure about an asset or fund’s financial performance. Performance disclosures often follow investment performance reports used to illustrate hypothetical returns.

Investment performance reports

Investment performance reports provide investors with timely information about a fund or portfolio’s:

  • Past performance
  • Cash flow
  • Net asset changes
  • Financial highlights or lowlights
  • Potential risks and costs incurred to achieve indicated results

Brokerages regularly provide performance reports on individual funds or portfolios so investors can track returns and adjust strategies.

But they don’t just provide reports on realized returns. They also provide illustrations of their performance in a hypothetical situation. (Example: if you invested $X in Fund Y on Z Date, your portfolio would now be worth $M.)

These hypothetical reports help investors examine potential performance. However, because these models rely on “back-tested” situations, they aren’t guarantees.

That’s where performance disclosures come in.

What is a performance disclosure?

A performance disclosure is a legal statement that outlines the brokerage’s assumptions and investor responsibilities in a performance report. They generally inform investors that the information provided is:

  • Historical and/or hypothetical, and does not guarantee future profits
  • Not an offer or suggestion to buy or sell specific securities
  • Solely for informational or illustrative purposes

This sounds complicated – but chances are, you’ve seen them a million times.

Why are performance disclosures important?

Performance disclosures seem like a way for investment firms to cover their butts legally. And technically, that’s true – but they also fill a more important role: investor edification and clarification.

Performance disclosures remind investors that reported information is based on theoretical data plugged into back-tested models. More than that, they nudge investors to commit due diligence before making any investment.

Investors often use performance reports to examine hypothetical returns and guide research. However, using these reports as the basis of your investment decisions or assuming guaranteed returns is foolhardy.

Asset performance constantly changes with market conditions. And while brokerages can highlight an asset’s potential, there’s no guarantee that investors will profit from a particular investment or strategy.

How do performance disclosures affect you?

Let’s look at a real-world example using our very own performance disclosure.

At Q.ai, we offer performance reports for all of our Investment Kits on a weekly, monthly and YTD basis. At the bottom of our report, we park our fine print.

Without regurgitating the statement in full, our Hypothetical Performance Disclosure informs website visitors that:

  • All performance represents hypothetical returns
  • Displayed numbers don’t include advisory or transaction costs
  • Data is furnished solely for informational purposes
  • There’s no guarantee any investor will achieve set profits and losses
  • We retain the right to update, revise and amend information as needed
  • The information is not an offer or solicitation to buy or sell securities
  • The information is not investment advice

Finally, we remind investors that past performance doesn’t guarantee future returns. And, of course, investing always involves risks and possible loss of capital.

What this means for you

Performance disclosures provide investors with crucial information and reminders while fulfilling an investment firm’s legal obligations. Still, that doesn’t mean brokerages can’t highlight the growth potential an asset (or Investment Kit) holds.

And so, we do.

If you’re ready to begin your investment journey, Q.ai has all the resources you need to get started. We can’t promise you’ll get rich. But together, we can build your investment knowledge and start the long trek toward lifetime financial stability.

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