FP511 Module 5 Flashcards
Financial Planning
defined in the Code and Standards as “a collaborative process that helps maximize a client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the client’s personal and financial circumstances.”
financial advice
The Code and Standards defines Financial Advice as
a communication that, based on its content, context, and presentation, would reasonably be viewed as a recommendation that the Client take or refrain from taking a particular course of action
Items that are NOT Financial Advice include the following
A communication that, based on its content, context, and presentation, would not reasonably be viewed as a recommendation
Responses to directed orders
The following, if a reasonable CFP® professional would not view it as Financial Advice:
Marketing materials
General financial education
General financial communications
relevant elements of financial planning
The relevant elements of financial planning are incorporated into the financial planning process when financial planning takes place.
According to the Code and Standards, relevant elements can include
developing client goals
managing assets and liabilities
managing cash flow
identifying and managing risks
identifying and managing the
financial effect of health considerations
providing for educational needs
achieving financial security
preserving or increasing wealth
identifying tax considerations
preparing for retirement
pursuing philanthropic interests
addressing estate and legacy matters.
integration factors
variables that weigh in determining whether Financial Advice requires Financial Planning.
“The number of relevant elements of the client’s personal and financial circumstances that the Financial Advice may affect”
“The portion and amount of the client’s Financial Assets that the Financial Advice may affect”
“The length of time the client’s personal and financial circumstances may be affected by the Financial Advice”
“The effect on the client’s overall exposure to risk if the client implements the Financial Advice”
“The barriers to modifying the actions taken to implement the Financial Advice”
CFP Board’s Code of Ethics (6 principles)
- 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.
CFB Boards Standards of Conduct
The Standards of Conduct (Standards) is a section of the Code and Standards that articulates professional duties that CFP® professionals must uphold
6 subsections:
- Duties owed to clients
- Financial Planning and Application of the Practice Standards for the Financial Planning Process
- Practice Standards for the Financial Planning Process
- Duties Owed to Firms and Subordinates
- Duties Owed to CFP Board
- Prohibition on Circumvention
Duties Owed to Clients (Standards of Conduct)
15 duties:
Duty of Loyalty & Care
Follow Client Instructions
Integrity
Competence
Diligence
Conflicts of interest
Professional judgment
Professionalism
Comply with law
Confidentiality and privacy
Provide information to client
Compensation method
Engaging with additional persons
Recommending and using technology
Refrain From Borrowing or Lending Money and Commingling Financial Assets
Practice Standards for the Financial Planning Process (standards of conduct)
set forth the level of professional practice expected of CFP® professionals engaged in financial planning
Duties Owed to Firms and Subordinates (standards of conduct)
Use reasonable care when supervising.
Comply with lawful objectives of the CFP® professional’s firm.
Provide notice of any public discipline enacted by CFP Board
Duties Owed to CFP Board (standards of conduct)
Avoid any adverse conduct.
Report incidents involving adverse conduct to CFP Board within 30 days.
Provide a narrative statement to CFP Board on reportable matters.
Cooperation with CFP Board throughout investigations and disciplinary proceedings.
Compliance with the Terms and Conditions of Certification and License (Terms).
Prohibition on Circumvention (standards of conduct)
CFP® certificants are prohibited from using a third party to conduct business that violates the Code and Standards.
Fiduciary duty
an ethical duty to make recommendations that are best for you, rather than their own financial benefit
Department of Labor (DOL) fiduciary standard (fiduciary duty)
The highest fiduciary standard
applied to advice given to qualified retirement accounts such as defined benefit and defined contribution plans
Overturned by court of appeals in June 2018.
Registered investment advisor (RIA) fiduciary standard (fiduciary duty)
This ruling found that Section 206 of the Advisors Act imposed a fiduciary duty on all RIAs. Under this standard, RIAs must act in the best interests of their clients.
Disclosure of compensation and conflicts of interest must be made in writing, and a contract is required.
RIAs must abide by the brochure rule, which requires providing every client and potential client with a copy of the firm’s Form ADV Part 2.
Registered representatives (RRs) and agents suitability standard
The standard that registered representatives and insurance agents are held to, is the suitability standard.
This is a more lenient standard in that an investment can be suitable but not necessarily in the best interests of the client.
While the vast majority of advisors under the suitability standard always do their best to put the client’s best interests first, the standard itself allows the opportunity for advisors to offer a suitable product that may be more in the advisor’s best interests rather than the client’s.
rules-based approach to a fiduciary standard
a series of rules and guidelines—essentially a checklist of dos and don’ts.
Having numerous rules increases complexity, creates opportunities for possible loopholes, and leads to enforcement issues.
Principle-based approach to fiduciary standard
The principle-based approach is more aspirational in nature and is the current approach instituted by RIAs and CFP® professionals.
Duty of Loyalty (fiduciary duty)
A CFP® professional must place the interests of the client above the interests of the CFP® professional and the CFP® professional’s firm. A CFP® professional also must avoid conflicts of interest, or fully disclose material conflicts of interest to the client, obtain the client’s informed consent, and manage the conflict.
A.1 from Code and Standards
Duty of Care (fiduciary duty)
A CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client’s goals, risk tolerance, objectives, and financial and personal circumstances.
A.1 from Code and Standards
Duty to Follow Client Instructions (fiduciary duty)
A CFP® professional must comply with the terms of the client engagement and follow all directions of the client that are reasonable and lawful.
A.1 from Code and Standards
Duty of Loyalty
the obligation to look first to the client’s best interests is the fundamental duty owed to the client. It is referred to as the duty of loyalty and requires that the client’s interests be put ahead of one’s own, and that all actions be made solely for the benefit of the client.
Duty of care
duty of care requires the fiduciary to have the competency to give fiduciary advice. This requires a certain level of knowledge and skill to know what is in the best interests of someone setting up a retirement plan or in the best interests of a retirement plan participant.
Uniform Prudent Investor Act
This act supersedes and modifies the prior common law rule in significant ways, primarily by placing focus on the total return of a portfolio rather than individual investment choices.
changed from analyzing each investment individually (which led to very skewed portfolios) and instead updated the prudent investor to focus more on the total portfolio and its risk/opportunity compared to the clients needs.
Duty to disclose
The duty to disclose all material facts and all conflicts of interest
Duty to diagnose
The obligations to know your customer and to investigate the suitability of any products recommended as investments are complementary and fall within the ethical duty to diagnose.
duty to consult
If you are deciding between two retirement account plans and only remember the details about one clearly so you recommend that to the client is a failure of your duty to consult with others who have specialized knowledge of the issue
duty to keep current
Because tax laws, product offerings, and the fortunes of individual securities issuers—and, indeed, entire industries—change over time, anyone operating as a professional in the financial services industry has an ethical duty to keep current with those developments that affect their clients.
CFP Board’s Fitness Standards
character and fitness standards for individuals seeking to obtain CFP® certification
Applies to both
Candidates for CFP® certification
Professional eligible for reinstatement (PER)
Does not apply to active CFP certificants
Respondent
any person who has agreed to the CFP Board’s Terms and Conditions of Certification and Trademark License or CFP® Certification Candidate Agreement
CFP Board Counsel
It has “the authority to investigate and issue a Complaint against a Respondent for alleged violations of (a) the Code of Ethics and Standards of Conduct
Hearing Panel
When a formal complaint is filed, a hearing takes place before a panel of a minimum of three individuals. At least one member of every hearing panel is a member of the Disciplinary and Ethics Commission (DEC), and at least two members must be CERTIFIED FINANCIAL PLANNER™ professionals.
Disciplinary and Ethics Commission (DEC)
The hearing panel submits its findings for review to the DEC for review consideration. The DEC is “composed primarily of CFP® professionals, has the authority to enter a final order that finds facts, determines whether a violation has occurred and, where appropriate, imposes discipline.”
Appeals Committee
The “CFP Board Counsel or Respondent may appeal a final order to CFP Board’s Appeals Committee of the Board of Directors (‘Appeals Committee’). The Appeals Committee is composed primarily of CFP® professionals and has the authority to issue CFP Board’s final decision.”
Interim Suspension
A suspension to a CFP certificant while investigation is underway.
Public Censure
A published written reproach of the certificant’s behavior.
Suspension
A suspension is a period of time in which Respondent remains subject to the Terms and Conditions of Certification and Trademark License but is not Certified or Licensed and is prohibited from using the CFP® certification marks, stating or suggesting that Respondent is a CFP® professional, or holding out to the public as being certified by CFP Board.
Revocation.
A permanent revocation of the right to use the CFP® marks—this is a permanent denial of all rights associated with use of the marks. Revocations normally are published.
Temporary Bar
A temporary bar is a period of time in which a Respondent who currently is not a CFP® professional is prohibited from applying for or obtaining CFP® certification.
Permanent Bar
A permanent bar is a permanent prohibition on the ability of a Respondent who currently is not a CFP® professional to apply for or obtain CFP® certification.
