Code and Standards and Code of Ethics Flashcards
Which of the following statements is/are correct concerning the CFP Board’s Code of Ethics?
The compensation of a CFP® Professional must be based upon the fair market value of the services agreed to in the engagement letter.
A CFP® Professional may not disclose confidential client information without their explicit consent.
Only I is correct
Only II is correct
Both I and II are correct
Neither I nor II is correct
Solution: The correct answer is D.
Compensation is addressed in section A of the Code and Standards and not in Ethics. Compensation must be fair and reasonable, but no market value requirement exists. There are several exceptions to the non-disclosure rules. For example, a CFP® professional may disclose confidential information if compelled to do so by a legal court document such as a subpoena.
According to the CFP Board’s Practice Standards, which of the following is/are correct?
If the scope of the engagement is limited to financial advice not requiring financial planning, no written agreement is required.
The Practice Standards for Financial Planning do not apply when the practitioner is engaged in financial planning.
Only I is correct
Only II is correct
Both I and II are correct
Neither I nor II is correct
Solution
Solution: The correct answer is A.
When financial advice that does not require financial planning is given, the agreement can be made orally and is not required to be in writing. The Privacy policy must be given in writing. If a financial Planner is engaged in Financial advice that does not require financial planning, the client is owed a fiduciary duty, but the Practice Standards for Financial Planning would not need to be followed. The Practice Standards must be followed when providing Financial Planning.
The intended purposes of the CFP Board Practice Standards include all of the following except?
To assure that the practice of financial planning by CERTIFED FINANCIAL PLANNER™ professionals is based on established norms of practice.
To advance professionalism in financial planning
To enhance the value of personal financial planning.
To establish baseline minimum obligations for contractual liability for the CERTIFED FINANCIAL PLANNER™ professional.
Solution: The correct answer is D.
the practice standards are not meant to be the basis for legal liability. The others fall within the spirit and intent of the CFP Board Code of Ethics and Standards.
Which of the following statements is/are correct concerning the CFP Board’s Code and Standards?
If a CFP® Professional suspects illegal activity is occurring within their organization, they have a duty to inform the appropriate regulatory authority.
A CFP® Professional must obtain sufficient quantitative and qualitative information relative to the scope of the engagement before making recommendations to a client.
Only I is correct
Only II is correct
Both I and II are correct
Neither I nor II is correct
Solution
Solution: The correct answer is B.
A CFP® professional must contact his or her immediate supervisor if they suspect illegal activity is occurring. They should only contact regulatory authorities in the event that no correct action is taken after they discuss the situation with their supervisor.
Your client Jill, who is currently age 42, is in a bind after her husband, Jack, age 44, died from a fall off a cliff while mountain climbing last month. Jill is now the sole provider for their two young children, Hansel and Gretel, and will need additional income to pay for child care for the kids for a few years. Unfortunately, there was no life insurance on Jack’s life (who would have ever thought he would die from a fall off a big hill?). Fortunately, Jack did have an IRA valued at $435,000, with Jill named as beneficiary. Which of the following is the best recommendation for Jill regarding withdrawals from the IRA?
Rollover the IRA into her own IRA and begin taking 72(t) distributions
Leave the IRA as is and begin taking 72(t) distributions
Leave the IRA as is and take distributions as needed
Rollover the IRA into her own IRA and take distributions as needed
Solution: The correct answer is C.
C is the best answer because Jill can take distributions as needed without penalty (death is a penalty exception) then, upon reaching age 59½, roll over the IRA to her own in order to delay required minimum distributions until she turns age 72 and can name her own beneficiary. The account will remain in Jack’s name with FBO Jill listed on the title.
Answers A and B are not suitable because the 72(t) substantially equal periodic payments must continue at least until Jill turns age 59½, but she only needs the money for a few years.
Answer D is not a good choice because the distributions would be subject to a 10% penalty since Jill is under age 59½.
According to the CFP Board’s Code of Ethics, all of the following information about a financial planning firm must be disclosed to prospective clients EXCEPT:
Compensation that any party to the agreement or any legal affiliate to a party to the agreement will or could receive under the terms of the agreement.
The identity of financial institutions the firm uses to deposit client funds.
Any information about the certificant or the certificant’s employer that could reasonably be expected to materially affect the client’s decision to engage the certificant.
Terms under which the certificant is restricted to offering proprietary products.
Solution: The correct answer is B.
Identification of depository institutions is not required, but all of the other items are required under Section A of the Code and Standards.
Harold Briggs, CFP® had joined a major brokerage firm, induced by a five-year forgivable loan of $1,000,000. After three years, he decided to jump ship and go with another firm, refusing to repay the balance of two years on the loan due to his assessment of the firm’s unethical business practices. Which of the following is correct in this case?
Harold’s failure to repay the loan is a private matter not within the purview of CFP Board.
The failure to repay the loan constitutes a violation of the CFP Board Code and Standards.
The matter is an issue for Harold’s certification only if it is shown that his former firm maintains ethical business practices.
The failure to repay the loan will result in an automatic suspension of Harold’s right to use the CFP® marks for an equivalent two-year period.
Solution: The correct answer is B.
Under Duties owed to Firms and Subordinates certificant has an obligation to his employer which was violated in this case. Moreover, the certificant engaged in conduct which reflects adversely on his integrity.
Peter and Marcella Kilko are 67 years of age and have been retired for two years. They obtained assistance from a financial planner on determining their retirement income and investments. After two years, however, they find that their assets and investments have declined substantially, and they are worried about a reduction in their retirement income. They expect to live for at least another 20 years in retirement and want to be sure they do not run out of money. They have consulted a different planner, who is a CFP® professional, to help them with reviewing and revising their retirement income planning. What is the first priority for action by the CFP® professional?
Provide client disclosures to the Kilkos.
Describe the investment strategies that could be used to increase income.
Explore with the Kilkos their financial goals, needs, and priorities.
Explain the scope of services the CFP® professional offers.
Solution: The correct answer is D.
The CFP® professional needs to explain the scope of services that he or she offers so the clients will know what the engagement will be. They need to know from the CFP® professional what they are entering into for an engagement. After this explanation is made, the planner will define the scope of the engagement and then provide the client disclosures. There would be no reason to provide the disclosures before there is an explanation of the services that the CFP® professional is providing.
Before entering into the first step of the financial planning process the client engagement must be established. After that is completed, then the planner will proceed to the active financial planning steps; gathering of information, including exploration of the clients’ financial goals, needs, and priorities. The description of investment strategies will be a later step of the financial planning process after the data gathering is completed.
What would likely rise to the standard of a material conflict of interest, and need to be disclosed by a CFP® professional?
That the CFP® professional recommended his personal accountant who gives the CFP® professional discounted accounting services.
The CFP® professional received an undisclosed fee for a referral to a municipal bond broker.
A client who is an attorney bought him a $50 fruit basket as a thank you for the referral.
The CFP® professional gave the name of his lawyer (also a high revenue client of the CFP® professional) to one of his clients who was wishing to divorce his wife.
Solution: The correct answer is D.
Referring one client to another is rife with potential conflicts of interest. Especially if both clients provide active revenue for the CFP® professional. A is not the best answer, a discounted accounting service is a conflict of interest but not likely material. B is incorrect a fee paid by a broker is a conflict of interest, but not immediately material as the CFP® professional is a fiduciary. C is not material.
