Showing Net Performance in Portfolio Subsets Is Hardest Part of Marketing Rule

A majority of investment advisers are struggling to market the performance of subsets and breakouts of investment portfolios for fear of running afoul of the marketing rule, according to a recent survey by The Seward & Kissel LLP law firm of 120 advisers.

The Marketing Rule governs the advertising practices of advisers and came into effect in November 2022. The rule keeps many traditional requirements designed to prevent misleading investors, while adding that advisers may not use gross performance of investments before fees and costs in marketing materials unless net performance after fees are charged is also used–or they may use net and omit gross.– In addition, advisers can’t use hypothetical performance unless it is relevant to a specific audience.

The survey, which sought to measure advisers’ feelings about the rule, found that 70% of advisers said that their marketing performance materials were the most affected by the rule; in comparison, just 25% said that their general communications with clients were most affected.

Among performance-related marketing materials, showing the gross versus net performance of investments was the most troublesome regulation to meet, and was cited by 76% of advisers as challenging.

Dan Bresler, a partner at Seward & Kissel and a co-author of the survey, says the key challenge here is with asset sub-sets: “the difficulty there is if you’re applying a fund level expense to a more narrow position.”

For example, a portfolio or pooled investment vehicle can be broken down by industry, region or other criteria for advertising purposes. The adviser would show the gross performance of the holdings in a portfolio and would then need to adjust for fees to show net performance. However, if those holdings are part of a product with many assets, and the fees are assessed to the product or portfolio as a whole, it can be difficult to calculate how much of those fees relate to that specific asset so the net performance can be calculated reasonably.

As for hypothetical performance, 46% of advisers answered that they never use hypotheticals in marketing and so are unaffected by the rule. Another 29% said there was no change in how they used hypothetical performance, 15% said they now do so less, 6% more and 4% stopped showing them completely once the rule was finalized.

The researchers found that private credit advisers struggled the most with hypothetical performance requirements, with 60% affirming that this provision was a challenge for them.

Bresler explains that private credit advisers often use target returns in their marketing as credit instruments are easier to predict. Since this is still, however, technically hypothetical performance, private credit advisers must be sure that the performance is well established and relevant to the audience receiving it.