Question

Performance-based fees are generally prohibited, but if an administrator allows it, there must be a disclosure that says...

A) "No guarantee of performance is made."
B) "Past performance is indicative of future results."
C) "The adviser reserves the right to change fees."
D) "Additional fees may apply based on performance."

Answer 1

The correct disclosure when performance-based fees are allowed is 'No guarantee of performance is made,' informing the client that such fees do not ensure profitable investments.

Step-by-step explanation:

The subject of this question is within the realm of investment management and financial regulation, specifically pertaining to the use of performance-based fees by financial advisors. When such fees are permitted, there is a regulatory requirement for disclosure to protect clients. The correct disclosure in this context would be A) "No guarantee of performance is made." This statement serves to inform the client that the payment of performance fees does not ensure that the investments will be profitable. The disclosure is a caution to clients that fees may be paid on the basis of strong performance, but losses are also possible, reinforcing the principle that past performance is not a guarantee of future results.