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Form ADV Part 1A Item 5L(3) · Answer type: yn · Item 5 - Advertising
Item 5L(3) asks whether any of the firm's advertisements include hypothetical performance - meaning model results, backtested returns, or projected performance that does not reflect actual client account results over the stated time periods.
Hypothetical performance includes any simulated, modeled, or backtested investment results that show how a strategy might have performed, rather than how it actually performed in live client accounts. This covers computer-generated backtests of investment models, projected returns based on assumptions, target performance figures, or illustrations of how a strategy would have worked under certain market conditions.
Common examples include backtested portfolio models showing how a strategy would have performed over past market cycles, Monte Carlo simulations projecting future results under different scenarios, or model portfolios demonstrating potential outcomes without reflecting actual client trading, fees, or timing. This also includes "paper trading" results or strategy simulations.
A firm showing how their "Value Strategy model would have returned 8% annually if implemented five years ago" or displaying projections of "potential portfolio growth over 20 years" would mark Yes. A firm showing only actual historical results from real client accounts would mark No.
Yes
The adviser includes model results, backtested performance, projections, or other simulated investment outcomes in their advertising. Under SEC rules, hypothetical performance must include specific disclosures about limitations, assumptions, and differences from actual client results.
No
The firm does not include hypothetical performance in advertisements on this checkbox. Their marketing may show actual historical performance from real accounts, or they may avoid performance displays altogether, but they do not use modeled or simulated results.
5L(3) - Do any of your advertisements include hypothetical performance (Yes / No).
This checkbox is part of Item 5L, which covers advertising practices under SEC marketing rule requirements for performance presentations.
Hypothetical performance can be misleading because it does not reflect the real-world challenges of implementing investment strategies, including transaction costs, market timing, cash flows, or behavioral factors. A Yes answer means you should carefully evaluate any model results and understand their limitations.
When firms present hypothetical performance, SEC rules require specific disclosures about the limitations of modeled results, key assumptions underlying the analysis, and differences between hypothetical and actual performance. However, even compliant presentations may overstate likely future results or underestimate implementation challenges.
A Yes does not tell you what assumptions underlie the hypothetical performance, whether the models reflect realistic trading conditions, how results might differ with actual client cash flows and timing, or whether the backtested strategies can be practically implemented. It also does not indicate whether the firm's actual client results match their hypothetical projections.
Use 5L(3) as a signal to request detailed information about model assumptions, ask for actual client performance data for comparison, and understand the limitations of any simulated results before making investment decisions.
Yes
The firm reports including hypothetical performance in advertisements. On the firm's Best Investors ADV panel, also check 5L(1)(a) to see if they show actual performance results, which allows you to compare their model projections against real-world outcomes. Review 5L(4) for predecessor performance that might also involve modeling assumptions.
If you are considering this firm, ask to see their actual hypothetical performance presentations with all required disclosures, request information about the underlying assumptions and methodologies, and compare any modeled results against the firm's actual client performance data.
No
The firm does not report using hypothetical performance on this checkbox. They may still show actual historical performance (5L(1)(a)) or predecessor performance (5L(4)) in their marketing. Check these related 5L rows to understand what types of performance information, if any, they do provide.
Look at the firm's investment services in Item 5G to understand their strategies, and review their regulatory assets under management in 5F(2)(c) to gauge the track record available behind any actual performance they might discuss.