Compliance · Disclosures
Hypothetical Performance
Also known as: Backtested performance
Hypothetical performance is investment performance not actually achieved by any client account, including backtested, model, and projected returns, and it carries its own SEC marketing restrictions. It is defined and restricted separately from actual performance under the SEC Marketing Rule, because a backtest or model can be shaped to look better than any account an investor could have actually held.
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What counts as hypothetical performance
| Type | Example | Counts as hypothetical? |
|---|---|---|
| Model portfolio performance | Returns for a portfolio that was designed but never funded with client money | Yes |
| Backtested performance | Applying today's strategy to historical market data as if it had been used at the time | Yes |
| Targeted or projected returns | A stated return goal for a strategy or fund | Yes |
| Interactive planning tool output | A retirement calculator where a user inputs assumptions and receives a simulated projection | No, if the tool discloses its methodology and limitations under 206(4)-1(e)(8)(ii)(A) |
| Predecessor performance | Actual results a manager achieved at a prior firm, shown under the separate predecessor-performance conditions | No, if it meets the conditions in 206(4)-1(d)(7) |
Requirements before it can appear in an advertisement
| Requirement | Detail |
|---|---|
| Audience-appropriateness policy | The adviser must adopt and implement written policies reasonably designed to ensure the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience |
| Methodology disclosure | Sufficient information for the audience to understand the criteria and assumptions used to calculate the hypothetical results |
| Risk and limitation disclosure | Sufficient information for the audience to understand the risks and limitations of using hypothetical performance in an investment decision |
| Advertisement trigger | Hypothetical performance pulls a communication into the rule even when sent to one person, unlike other content which requires more than one recipient. Three exclusions still apply: extemporaneous live oral communications, hypothetical performance given in response to an unsolicited request, and hypothetical performance given one-on-one to a prospective or current private fund investor |
What this means for your marketing
A backtest slide needs its assumptions on the slide, not in an appendix. The rule requires the audience to understand the criteria and assumptions used, which a footnote pointing to a separate document does not reliably deliver in a video.
General audience content is a difficult home for hypothetical performance. Because the adviser needs written policies matching hypothetical results to an audience's likely financial situation, a public YouTube video with no viewer screening makes that match hard to demonstrate.
One viewer is enough to trigger the rule. Unlike most advertisement triggers under the Marketing Rule, which require a communication to more than one person, a written or recorded communication containing hypothetical performance is an advertisement even when sent to a single recipient. The rule still carves out extemporaneous live oral communications, responses to unsolicited requests, and one-on-one communications with private fund investors.
A projected return is hypothetical performance too. Stating a target or projected number for a strategy carries the same audience-appropriateness and disclosure obligations as a full backtest, even without historical data behind it.
What this looks like in practice
206(4)-1(d)(6)(ii) requires enough information for the audience to understand the criteria and assumptions used.
The rule requires policies ensuring hypothetical performance is relevant to the likely financial situation of the intended audience, difficult to demonstrate for an unrestricted public upload.
206(4)-1(d)(6)(iii) requires disclosure of the risks and limitations of using hypothetical performance.
Common questions
Primary sources
- 17 CFR 275.206(4)-1(d)(6) and (e)(8), Investment Adviser Marketing, hypothetical performance provisionsfull rule text, hypothetical performance at (d)(6) and definition at (e)(8)
Related terms
Daniel Schoester
Founder & CEO
Daniel Schoester combines years of SEO obsession with financial know-how. After receiving an Honours Bachelor of Business Administration (Finance), Daniel began working at a prominent mortgage website, where his content quickly quadrupled monthly traffic to over one million views.
Building on this success, Daniel launched Croton Content to help clients scale through evergreen content assets — notably working with Forbes Advisor, Moneywise, and Hardbacon.
In 2024, Daniel expanded his focus to YouTube after studying Google’s algorithm changes. He noticed YouTube’s increasing alignment with search visibility compared to traditional written SEO content — plus its ability to generate passive revenue and long-term brand authority.
Educational information only. This is not legal or compliance advice. Confirm current requirements with your compliance officer and the primary sources above.