The Investment advisors Act of 1940 defines advertising as any letter, notice, circular or other written communication addressed to more than one person, as well as any notice in a publication or by radio or TV that contains:


  • Graphs, charts, formulas or other devices used to determine how to choose a security or when to buy or sell a security.
  • Information that offers analysis, reports or publications concerning securities or when to buy or sell a security.
  • Any other investment advisory service that relates to securities.

Advertising Standards
IA advertising is not permitted to:
  • Refer (directly or indirectly) to testimonials about the advisor.
  • Refer to past specific recommendations that were profitable. However, an IA may advertise a list of ALL recommendations made within the immediate past year (or longer), as long as all pertinent information is included (date of recommendations, market price at time of buy, sell and current), along with a disclaimer on the first page stating: "It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.""
  • Advertise that any report, analysis or other service is free of charge if that is not completely true. There must be no obligation or condition of any kind.
  • Represent that a graph, chart, formula or other device can (by itself) be used to determine which securities to buy or sell without disclosing the limitations in doing so.

Performance Advertising
The SEC has clarified in a guidance statement (the Clover Capital letter) that advertising of actual performance data will be prohibited if the advertising:
  • Includes results that don't reflect the impact of brokerage commissions, advisory fees, and other client-paid expenses.
  • Fails to disclose the effect that market or economic conditions had on the results.
  • Fails to disclose whether or not the results shown reflect reinvestment of dividends and capital gains.
  • Makes claims about the future potential for profit without also mentioning the possibility of loss.
  • Fails to disclose (if applicable) that performance results related only to a select group of the IA's clients.
  • Compares results to an index without disclosing all material facts relevant to the comparison.
  • Fails to disclose any material conditions, objectives or investment strategies used to obtain the results.

Restrictions on Fees
There are few specific restrictions on fees within either the Investment advisors Act of 1940 or the Uniform Securities Act. The advisory fee must not be "unreasonable," which means that it generally should be in line with what other advisors charge. Under the Uniform Securities Act, the following types of fee arrangements are permitted:
  • Fees based on a percentage of assets under management.
  • Flat annual dollar amount for services agreed upon.
  • Brokerage fees on trades made for clients.
  • Wrap fees that include all services (asset management and transactional fees) into a single annual fee.

As mentioned above, performance-based fees are generally prohibited. Only two types of clients may be charged such a fee:
  • Registered investment companies (mutual funds);
  • An individual with an account value in excess of $1 million (Uniform Securities Act); or
  • An individual with an account value in excess of $750,000 AND a net worth of at least $1,500,000 (Investment advisor Act).

In these cases, a performance-based fee known as a "fulcrum fee" is permitted. A fulcrum fee provides for a base fee to be paid to the advisor, with additional fees permitted for performance above a specific benchmark. However, this is allowed only if the base fee would be reduced equally for inferior performance beneath the benchmark.
State Securities and Insurance Laws

Related Articles
  1. Investing

    8 Investing Fees That You Should Never Pay

    In investment management and financial planning there are a plethora of fees that are unnecessary.
  2. Financial Advisor

    5 Signs Fund Fees Are Hammering Your Investments

    The worst long-term killer of investment gains isn’t the market; it’s fees, especially for retirement accounts. How do you know if you're paying too much?
  3. Investing

    A Guide To Investor Fees

    Fees are one of the most important determinants of investment performance and something that every investor should know.
  4. Tech

    Will Advisory Fees See More Downward Pressure?

    While advisory fees have been holding steady, industry trends could put downward pressure on them.
  5. Investing

    Are Fees Depleting Your Retirement Savings?  

    Each retirement account will have a fee associated with it. The key is to lower these fees as much as possible to maximize your return.
  6. Financial Advisor

    How to Talk Fees with Clients

    Talking about fees with clients is not always a fun discussion. Here's the best way to go about it.
  7. Financial Advisor

    What Hiring a Financial Advisor Costs in 2016

    When it comes to the price tag on a financial advisor's services, transparency is often lacking. That's why it's important to do your homework.
  8. Investing

    3 Investment Fees That Are Negotiable

    Investment fees are a necessary evil but that doesn't mean they have to be overly costly. There are ways to negotiate some of the expenses down.
  9. Investing

    Investors: Your Fees Are Probably Too High

    The lower your fees, the higher your returns. Here's how to find out if you're paying too much for your investments.
  10. Investing

    Are Hidden Fees Eroding Your Participants’ Return?

    Plan sponsors need to know the fees associated with their plan to determine if they are reasonable.
Frequently Asked Questions
  1. Why Do Most of My Mortgage Payments Start Out as Interest?

    Fear not: Over the life of the mortgage, the portions of interest to principal will change.
  2. What is the difference between secured and unsecured debts?

    The differences between secured and unsecured debt, and how banks buffer risks associated with each type of loan through ...
  3. How Many Times has Warren Buffett Been Married?

    Warren Buffett has been married twice in his life, but the circumstances surrounding the marriages were unconventional.
  4. What's the smallest number of shares of stock that I can buy?

    Many people would say the smallest number of shares an investor can purchase is one, but the real answer is not as straightforward. ...
Trading Center