Net Performance

Alder Peak Capital's new fact sheet shows its flagship strategy returned 12.4% last year, in 24-point type, with the after-fee figure of 10.9% in a footnote at the bottom in 6-point type. Under the SEC marketing rule, this presentation is:

1. A.Acceptable, because gross performance better reflects the manager's investment skill apart from fee choicesThat argument has real analytical merit, which makes it tempting, but the rule requires the investor to see what she would actually have earned.
2. B.Deficient, because net performance must be shown with at least equal prominence to gross performance over the same periodCorrect. Equal prominence is the operative standard, so burying net performance in small-type footnotes fails even though the number is disclosed.
3. C.Deficient, because an adviser may never show gross performance in a retail advertisement under any circumstancesGross performance is permitted. What is required is that net performance accompany it with equal prominence.
4. D.Acceptable, because the net figure is disclosed and a reasonable investor is expected to read footnotesPresence is not prominence. The rule was written precisely to stop performance from being framed by the gross number.

Why: When an SEC-registered adviser presents gross performance, it must present net performance with at least equal prominence, calculated over the same time period and using the same methodology. A headline gross number with a tiny footnoted net number fails the equal-prominence requirement, because the reader's impression is formed by the large figure. The clue is the 24-point versus 6-point contrast. Review the marketing rule's performance requirements.

Belmore Wealth wants to include in a client presentation a chart showing that its flagship strategy returned 14.2% a year over five years, calculated before the deduction of advisory fees. Under the SEC marketing rule, Belmore:

1. A.May not present investment performance of any kind in an advertisementPerformance advertising is permitted; the rule regulates how it must be presented.
2. B.May show gross performance alone if the presentation is given only to institutional investorsThe requirement applies to advertisements generally, not only to retail audiences.
3. C.May show gross performance alone provided a footnote states that advisory fees would reduce returnsA footnote is not equal prominence, and the rule requires the net figure itself, not a generic caution.
4. D.May not show gross performance unless net performance appears with at least equal prominence, over the same period and in the same formatCorrect. Gross may be shown only alongside equally prominent net performance.

Why: The marketing rule forbids presenting gross performance in an advertisement unless net performance is shown as well, with at least equal prominence, calculated over the same time period and using the same type of return and the same presentation format. The reason is that fees compound: a figure that ignores them systematically overstates what a client actually received. A footnote saying that fees would reduce returns does not satisfy the equal-prominence requirement, and the rule applies whether the audience is retail or institutional.