Code Words: Behavioral Finance, Code of Ethics, Standard of Conduct Flashcards
Heuristics
Experiences, biases, generalizations
Rule of Thumb
Behavioral Finance
Psychology
Anchoring
Price attachment
Attachment Bias
Emotional attachment vs. Practicality
Endowment Bias
Emotion. Values more because of ownership.
Cognitive Dissonance
Reconciling two opposing beliefs.
Confirmation Bias
Accept info that CONFIRMS our preconceived opinion. Decline unsupportive info.
Diversification Errors
Error of equal diversification
Fear of Regret
Taking no Action. Afraid of decision making.
Gambler’s Fallacy
Belief in random events follow an event(s).
Herd Behavior
Actions that mimic a larger group. FOMO.
Hindsight Bias
Hindsight’s 20/20. Doesn’t actually understand.
Inappropriate Extrapolation
Error of thinking recent conditions will continue indefinitely.
Analysis Paralysis
Over-analysis followed by paralyzed decision making.
Loss Aversion & Risk Taking
Risk Averse when it comes to gains, Risk Tolerant when it comes to losses.
Prospect Theory
Losses hurt more than the happiness that gains could bring.
Mental Accounting
Looking at sources of money differently. Sources/Uses.
Outcome Bias
Decision making based off of desired outcome vs. probability of that outcome.
Overconfidence
Emphasis on ones own ability. (Confirmation bias).
Overreaction
Emotional reaction to new market information.
Overweighting recent past
Investors like patterns, and recent past is easier to understand. Lack of research and understanding also plays a role.
Self-Affirmation Bias
Something goes right its my doing. Something goes wrong its someone else’s fault.
Confirmation bias vs. Overconfidence vs. Self-Affirmation bias
Accepting preconceived opinion vs. Too much emphasis on ones own ability vs. My doing against someone else.
Spotting Trends That Are Not There
Seeking supportive patterns without doing research.
Status Quo Bias
Doing nothing when action is required.
Code of Ethics
- Act with honesty, integrity, competence, and diligence.
- Act in the client’s best interest.
- Exercise due care.
- Avoid or disclose and manage conflict 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.
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.
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.
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.
Standards of Conduct:
A. Duties Owed to Clients
4. Diligence
A CFP® Professional must provide services and responses to inquiries in a timely manner.