Code Words: Behavioral Finance, Code of Ethics, Standard of Conduct Flashcards
1
Q
Heuristics
A
Experiences, biases, generalizations
Rule of Thumb
2
Q
Behavioral Finance
A
Psychology
3
Q
Anchoring
A
Price attachment
4
Q
Attachment Bias
A
Emotional attachment vs. Practicality
5
Q
Endowment Bias
A
Emotion. Values more because of ownership.
6
Q
Cognitive Dissonance
A
Reconciling two opposing beliefs.
7
Q
Confirmation Bias
A
Accept info that CONFIRMS our preconceived opinion. Decline unsupportive info.
8
Q
Diversification Errors
A
Error of equal diversification
9
Q
Fear of Regret
A
Taking no Action. Afraid of decision making.
10
Q
Gambler’s Fallacy
A
Belief in random events follow an event(s).
11
Q
Herd Behavior
A
Actions that mimic a larger group. FOMO.
12
Q
Hindsight Bias
A
Hindsight’s 20/20. Doesn’t actually understand.
13
Q
Inappropriate Extrapolation
A
Error of thinking recent conditions will continue indefinitely.
14
Q
Analysis Paralysis
A
Over-analysis followed by paralyzed decision making.
15
Q
Loss Aversion & Risk Taking
A
Risk Averse when it comes to gains, Risk Tolerant when it comes to losses.
16
Q
Prospect Theory
A
Losses hurt more than the happiness that gains could bring.
17
Q
Mental Accounting
A
Looking at sources of money differently. Sources/Uses.
18
Q
Outcome Bias
A
Decision making based off of desired outcome vs. probability of that outcome.
19
Q
Overconfidence
A
Emphasis on ones own ability. (Confirmation bias).
20
Q
Overreaction
A
Emotional reaction to new market information.
21
Q
Overweighting recent past
A
Investors like patterns, and recent past is easier to understand. Lack of research and understanding also plays a role.
22
Q
Self-Affirmation Bias
A
Something goes right its my doing. Something goes wrong its someone else’s fault.
23
Q
Confirmation bias vs. Overconfidence vs. Self-Affirmation bias
A
Accepting preconceived opinion vs. Too much emphasis on ones own ability vs. My doing against someone else.
24
Q
Spotting Trends That Are Not There
A
Seeking supportive patterns without doing research.
25
Status Quo Bias
Doing nothing when action is required.
26
Code of Ethics
1. Act with honesty, integrity, competence, and diligence.
2. Act in the client's best interest.
3. Exercise due care.
4. Avoid or disclose and manage conflict of interest
5. Maintain the confidentiality and protect the privacy of client information
6. Act in a manner that reflects positively on the financial planning profession and CFP certification.
27
Standards of Conduct:
A. Duties Owed to Clients
1. Fiduciary Duty
When providing Financial Advice, a CFP® professional must act as a fiduciary.
Duty of Loyalty: Place interests of client above all, no matter what.
Duty of Care: Must act with care, skill, prudence, and diligence in regards to the client's goals, risk tolerance, objectives, and financial/personal circumstances.
Duty to Follow Client Instructions: CFP® must comply with the objectives, policies and restrictions of the Engagement, and reasonable/lawful directions of the client.
28
Standards of Conduct:
A. Duties Owed to Clients
2. Integrity
CFP® professional must perform with honesty and candor. Allowance may be made for innocent error and legitimate differences of opinion.
29
Standards of Conduct:
A. Duties Owed to Clients
3. Competence
A CFP® professional must provide professional services with relevant knowledge and skill.
If a CFP® professional is not competent in an area, the CFP® professional must obtain the assistance of a competent professional, limit/terminate the Engagement, and/or refer the client to a competent professional.
30
Standards of Conduct:
A. Duties Owed to Clients
4. Diligence
A CFP® Professional must provide services and responses to inquiries in a timely manner.
31
Standards of Conduct:
A. Duties Owed to Clients
5. Disclose and Manage Conflicts of Interest
A CFP® professional must make full disclosure of all Material Conflicts of Interest, and obtain consent of the client. Before providing any professional advice to which such conflicts of interest could apply, evidence of oral disclosure of a conflict is appropriate, written consent to a conflict is not required.
32
Standards of Conduct:
A. Duties Owed to Clients
6. Sound and Objective Professional Judgement
A CFP® professional must practice professional judgement on behalf of the client that is not subordinated to the interest of the professional. The CFP® professional may not solicit or accept any gift, gratuity, entertainment, non-cash compensation, or other consideration that could compromise the relationship.
33
Standards of Conduct:
A. Duties Owed to Clients
7. Professionalism
A CFP® professional must treat everyone with dignity, courtesy, and respect.
34
Standards of Conduct:
A. Duties Owed to Clients
8. Comply with the Law
A CFP® professional must comply with the laws, rules and regulations governing professional services, and may not intentionally participate in another person's violation.
35
Standards of Conduct:
A. Duties Owed to Clients
9. Confidentiality and Privacy
A CFP® professional must keep confidential and may not disclose any non-public personal information of a prospective, current, or former client, EXCEPT:
- For ordinary business purposes presuming the client has consented to sharing
- To others employed by CFP professionals firm when the sharing of info is necessary to provide financial planning services.
- To provide info the CFPs attorneys, accountants
- To provide info to auditors of the CFP professional or the firm
- To a person authorized to represent the client.
- Circumstances relating to legal and enforcement purposes may operate as exceptions to the general rule.
* The CFP professional and the firm must implement policies to protect against inappropriate sharing of clients non-public personal information. Disclosure of these policies should be made to clients in writing no later than at the time of the engagement with annual updates if any material changes to the policies have occurred.
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Standards of Conduct:
A. Duties Owed to Clients
10. Provide Information to a Client
When providing Financial Advice A CFP® professional must provide to the client, prior to or at the time of the engagement and document that the info has been provided:
- Description of services and products, how the client pays including any additional costs, how the CFP® professional and firm are compensated, any public discipline, etc. SEE STNDRDS.
When providing Financial Planning, a CFP® professional must provide the terms of the engagement prior to, or at the time of the Engagement.
A CFP® professional has an ongoing obligation to provide to the client any info that is a material change or update. Public disciplinary history or bankruptcy info must be disclosed to the client within 90 days (with relevant web pages).
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Standards of Conduct:
A. Duties Owed to Clients
11. Duties when Communicating with a Client
A CFP® professional must provide a client with accurate info in accordance to the engagement, and in response to client requests, in an understandable format.
38
Standards of Conduct:
A. Duties Owed to Clients
12. Duties when representing compensation method
Fee-Only: no sales related compensation.
Fee-Based: Fees and sales related compensation.
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Standards of Conduct:
A. Duties Owed to Clients
13. Duties when Recommending, Engaging, and working with additional persons
A CFP® professional is required to:
communicate the responsibilities assumed by each financial service professional, and establish scope.
inform the client if the CFP® professional believes that the other professional's services were not performed in an appropriate manner.
40
Standards of Conduct:
A. Duties Owed to Clients
14. Duties when selecting, Using, and Recommending Technology
A CFP® professional is required to: Practice reasonable judgement and care when selecting, using, or recommending technology/software; understand the assumptions/outcomes of selected tech: and believe the tech produces reliable and objective results.
41
Standards of Conduct:
A. Duties Owed to Clients
15. Refraining from borrowing or lending money and commingling financial assets
Borrowing or lending relative to a client is generally prohibited, EXCEPT:
Client is a member of the CFP® professional's FAMILY, or,
The lender's normal business entails the business of lending money.
42
T or F: A CFP® professional, either directly or through the CFP® Professional’s Firm, must adopt and
implement policies regarding the protection, handling, and sharing of a client’s non-public personal
information and must provide a client with written notice of those policies at the time of the
Engagement and thereafter not less than annually (at least once in any 12-month period) unless (i)
the CFP® professional’s policies have not changed since the last notice sent to a client; and (ii) the
CFP® professional does not disclose non-public personal information other than as permitted without
a client’s consent.
T
43
Financial Enmeshment Bias
Finances of parents and children are inappropriately commingled.
44
The Financial Planning Process:
Understand the client, Identify Goals, Analyze current/potential alternatives, Develop Rec, Present Rec, Implement Rec, Monitor/Update.
45
Eight Principal Knowledge Categories:
Professional Conduct and Regulation
General Financial Planning Principles
Psychology of Financial Planning
Insurance Planning
Investment Planning
Tax Planning
Retirement Planning
Estate Planning
46
T or F: The financial planning agreement must be in writting?
T
47
Qualitative vs. Quantitative
Qualitative can be subjective, Quantitative is factual info.
48
Code of Conduct
Under the Code of Ethics a CFP® Professional must:
- Act with honesty, integrity, competence, and diligence
- Act in the client's best interests
- Exercise due care
- Avoid or disclose and manage conflicts of interest
- Maintain the confidentiality and protect the privacy of client information
- Act in a manner that reflects positively on the financial planning profession and CFP certification
49
Standards of Conduct:
B. The Application of the Practice Standards for the Financial Planning Process
1. Financial Planning Defined
Collaborative process intended to maximize a client's potential for meeting life goals by applying financial advice that considers numerous relevant aspects of the client's financial and personal life.
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Standards of Conduct:
B. The Application of the Practice Standards for the Financial Planning Process
2. Relevant Elements of the Client's Personal and Financial Circumstances
Elements of the client's personal and financial circumstances would effect the development and implementation of the financial plan.
51
Standards of Conduct:
B. The Application of the Practice Standards for the Financial Planning Process
3. Applying the Practice Standards
The CFP® is required to proving planning that integrates relevant elements, and act in the clients best interest
52
Standards of Conduct:
B. The Application of the Practice Standards for the Financial Planning Process
4. Integrating Relevant Elements
CFP® professional must address the scope of relevant elements, the amount of the client's assets to be considered, the length of time that financial advice or planning could change, risk the client would assume by implementing the advice, barriers to implementation.
53
Standards of Conduct:
B. The Application of the Practice Standards for the Financial Planning Process
5. Disciplinary Issues
The CFP Board expects CFP® professionals to apply the practice standards when they are providing process-driven financial planning and/or advice.
54
Standards of Conduct:
B. The Application of the Practice Standards for the Financial Planning Process
6. No Client Agreement to Engage in Financial Planning
If the client does not agree the engage the CFP® professional to provide process-driven financial planning, the professional is REQUIRED to: Decline or terminate the engagement, limit the scope so that Practice Standards would not apply and communicate the services that would not be provided, and provide the requested services following a clear explanation of how financial planning would benefit the client and how it may limit the advice/not require adherence to the Practice Standards.
55
T or F: If a client does not wish to engage in the FPP, the CFP® professional may EITHER terminate the relationship, or limit the scope.
T
56
Standards of Conduct: Practice Standards for the FPP
C. Understanding the Client's Personal and Financial Situation
Gather Qualitative and Quantitative data.
Qual = Quality = Subjective. Emotions and Wishes
Quant = Quantify = FACTS.
57
Standards of Conduct: Practice Standards for the FPP
C. Identifying and Selecting Goals
The CFP® professional must share with the client the professional's view of the client financial and personal situation to enable the client to identify reasonable financial goals. Must also explain how one goal can have an effect on other goals.
58
Standards of Conduct: Practice Standards for the FPP
C. Analyze the Client's Current Course of Action and Potential Alternatives
Consider the advantages and disadvantages of the client's current course of action, and also consider alternatives to help achieve goals.
59
Standards of Conduct: Practice Standards for the FPP
C. Developing the Financial Planning Recommendations
Identify recommendations. Each recommendation should move the client closer to their goals.
Each recommendation should address: Assumptions and estimates agreed upon, basis for recommendation, effects on personal and financial circumstances, how it impacts other courses of actions, priority and timing, whether implementing one rec requires another rec.
Current course of action is also be a recommendation.
60
Standards of Conduct: Practice Standards for the FPP
C. Presenting the Financial Planning Recommendations
Explain recommendations to client. Specify assumptions used.
61
Standards of Conduct: Practice Standards for the FPP
C. Implementing the Financial Planning Recommendations
Revisit implementation responsibilities.
62
Standards of Conduct: Practice Standards for the FPP
C. Monitoring and Updating the Financial Plan
Revisit monitoring and updating responsibilities. Both for the client and professional.
The CFP® professional is required, at appropriate intervals, to analyze the progress of the plan towards achieving the clients goals, and explaining the results.
63
Standards of Conduct: Duties Owed to Firms and Subordinates
D. Dealing with Subordinates
Professional is expected to supervise employees and others who report to them in a manner that is compliant with laws and regulations as well as the Standards of Conduct.
64
Standards of Conduct: Duties Owed to Firms and Subordinates
D. The CFP Professional and the Firm
A professional that violates rules of the firm that DO NOT conflict with the CFP Board's Practice standards, may be subject to investigatory and disciplinary action by the board.
If rules are violated that DO conflict, the CFP Board will not pursue.
65
Standards of Conduct: Duties Owed to Firms and Subordinates
D. Notifying the Firm of Disciplinary Action(s)
A Professional must notify the professionals firm in a timely manner of any public discipline ordered by the CFP Boards DEC. Forms of public discipline include:
Letters of admonition
Suspension
Revocation of the CFP® marks
66
Standards of Conduct: Duties Owed to the CFP Board
E. Compliance with Conditions of Certification
Examples of negative circumstances include the following:
The CFP® Board considers a felony to be an offense punishable by at least ONE YEAR of prison and/or a fine of $1,000 or higher.
Conviction of a misdemeanor or admission into a legal program that withholds or defers judgement of such relevant misdemeanor. Conduct that may fall into this category generally include: fraud, theft, misrepresentation, a second drug or alcohol related offense, dishonest conduct or crimes of moral turpitude that violates the sentiment or accepted standard of the community.
A personal bankruptcy filing or adjudication. The CFP Board will generally not deem the professional to be unfit if the professional can prove that the bankruptcy was not the result of the inability to manage the firm's financial matters.
Bankruptcy of the firm for which the CFP® professional was a control person. The CFP Board generally will not deem the professional to be unfit if the professional can prove that the bankruptcy was not the result of the inability to manage the firm's financial matters.
A Federal tax lien imposed on property owned by the CFP® professional. The CFP Board will generally not deem the professional to be unfit if the professional can prove that the lien was not the result of the inability to manage his/her financial matters.
A state or local tax lien or judgement that the CFP® professional failed to satisfy within a reasonable length of time. The CFP Board will generally not deem the professional to be unfit if the professional can prove that the lien was not the result of the inability to manage the firms financial matters.
67
Standards of Conduct: Duties Owed to the CFP Board
E. Reporting Requirements
The general rule is that charges or convictions discussed in the previous FC MUST be reported to the CFP Board within 30 days of the charge or conviction. The report MUST BE IN WRITING and include a narrative statement with all the facts and outcomes.
68
Standards of Conduct: Duties Owed to the CFP Board
E. Cooperation
A CFP® professional must cooperate in full with requests and investigations as well as disciplinary proceedings and rulings. Check the Code on this. Too long. Below are some highlights.
Reporting requirements do not apply to minor rule violations. A minor rule violation of an SEC rule or rule of a self-regulator where the fine of $2,500 or less and the alleged violator does not contest the charge of the violation.
An exception to the reporting requirement is available if the settlement or arbitration award was for less than $15,000
Being a subject of a customer complaint relative to one or more sales practice violations when the customer sought an adjustment of $5,000 or more.
Settling for an amount of $15,000 or more in conjunction with one ore more sales practice violations.
69
Circumvention Prohibited
Under no circumstances may a CFP® professional act in any manner either directly or indirectly in violation of the CFP Board's Code of Ethics and Practice Standards.
70
CFP Board Disciplinary Procedures: DEC
The CFP Board's Disciplinary and Ethics Commission is responsible to investigate and take appropriate action regarding alleged violations of the Code of Ethics and Practice Standards.
A DEC member must have prior service as a hearing panel volunteer.
71
CFP Board Disciplinary Procedures: Disciplinary Actions
When the DEC finds a professional to have been in violation of the Code or Standards, it may impose private or public disciplinary actions.
Private disciplinary action- Additional CE or censure to cite the Practice Standards violation
Public disciplinary action- Public letter of admonition, suspension for up to FIVE years, or permanent revocation of the marks.
72
CFP Board Disciplinary Procedures: Appeals
The individual may appeal any ruling from the DEC by filing, WITHIN 30 DAYS OF THE NOTICE of the adverse ruling BY MAIL. This is accomplished by submitting a Petition for Appeal generally by Certified Mail.
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What is the fiduciary standard?
When providing financial advice to a client a CFP professional is always required to act as a fiduciary.
74
Sales related compensation
Commissions, 12b1 fees, trailing commissions, bid/ask spreads, transaction fees, revenue sharing, solicitor fees.
75
Non-sales related compensation
Soft dollars, reasonable fees for custodial or similar administrative services, non-monetary benefits, reasonable fees for professional services, certain advisory fees relating to TAMP, a fee that a related solicitor receives for soliciting clients for the CFP professional.
