General Principles: Chapter 2 Flashcards
What are the codes of conduct by the CFP Board that took effect on Oct. 1, 2019?
- Act with integrity, honesty, competence and diligence
- Act in the client’s best interest
- Exercise due care
- Avoid or disclose and manage conflicts of interest
- Maintain the confidentiality and protect the privacy of client info
- Act in a manner that reflects positively on the financial planning profession and the
CFP certification
What is the fiduciary standard?
When providing financial advice to a client, the CFP is always required to act as a fiduciary. The fiduciary honors the interest of the client above all and owes certain duties to the client
What is the duty of loyalty?
The CFP is required to hold interests of the client above those of themselves and the firm and balance conflicts of interest so as to maintain the client’s best interest above all
What is the duty of care?
The CFP is required to act with the skill, prudence and diligence of a prudent professional in consideration of the clients goals, risk tolerance and personal circumstances
What is the duty to follow client instructions?
The CFP is required to comply with the client’s instructions, objectives, policies and restrictions presuming they are reasonable and lawful
Under the Duty of Integrity, what may a CFP not do either directly or indirectly?
- Deceive or defraud clients and the public in general
- Make untrue statements of material facts
- Omit a material fact in order to mislead a client or the public in general
- Encourage any business act that would operate as a fraud or deceit upon anyone
*Errors made by the CFP will generally not be deemed to violate the Duty of Integrity as long as they were not deceitful or fraudulent
What is a CFP required to do under the competence standard?
- Provide professional services with competence encompassing relevant knowledge
and skill - Recognize their lack of competence in certain areas and do one of the following
a. Obtain the assistance of a competent professional
b. Refer the client to one or more competent professionals
c. Limit or terminate the engagement - Make clear to the client any requested professional services the CFP or firm will not
provide
Under the Diligence Standard what is the CFP required to do?
- Provide services in a professional manner
- Respond to reasonable client inquiries and requests in a timely fashion
Under the standard to disclose and manage conflicts of interest what is the CFP required to do?
- Make full disclosure of all material conflicts of interest that could affect the
relationship with the client - Disclose information relating to conflicts of interest in sufficient detail and
understandable language - Give detailed disclosure so the client can make an informed decision as to accepting
or rejecting CFP’s recommendations - CFP must obtain consent of client before providing any financial advice
What are the two requirements of the Sound and Objective Professional Judgement standard?
- Exercise professional judgement that holds the client’s best interest above the
planner and/or firm - Refuse any gift or gratuity consideration/payment that could compromise their
objectivity
What is the Professional Standard for a CFP?
Treat other with dignity, courtesy and respect. This includes clients, prospects, colleagues and the general public
What is the Standard to Comply with the Law for a CFP?
- Comply with laws and rules that apply to CFP’s professional services of financial
planning - May not intentionally or recklessly participate or assist in another person’s violation of
such standards, regulations and rules
What are the requirements under the Confidentiality and Privacy Standards for the CFP?
- Maintain confidentiality regarding any non-public personal information pertaining to
current, former or perspective clients - Recognize those circumstances under which client information may be shared
a. For ordinary business purposes
b. To others employed by CFP’s firm when its necessary for financial planning
c. To CFP’s attorneys or accountants
d. To auditors of the CFP’s firm
e. To a person authorized to represent the client
What exceptions are there to the confidentiality and privacy standards?
- To cooperate with law enforcement agencies investigating suspected unlawful
activities - To comply with federal, state and local law
- To cooperate with a duly authorized government investigation
- To provide defense to claims for damages lodged by former or current clients
- To cooperate with CFP board relative to it’s investigation
- To inform relevant professional organizations that must evaluate CFP’s adherence to
recognized professional standards
What is SEC regulation S-P?
SEC has adopted notice requirements and restrictions on a financial institution’s ability to disclose nonpublic personal information about customers.
Under the standard to provide information to a client in conjunction with providing or agreeing to provide financial advice or planning what is required of the CFP?
- Description of products and services the CFP/firm will provide
- A clear explanation of how the client will pay for the products and services
a. inclusive of commissions, management fees, surrender charges and mutual fund
loads
What must the CFP inform clients about in regards to issues that may compromise the perception of their reputation?
- Any disciplinary action relating to the CFP’s professional conduct
- Bankruptcy of the CFP or firm
- Info from websites of regulators about CFP’s disciplinary history, personal bankruptcy
or bankruptcy of the firm if the CFP was the control person - Any info that would be material to the client’s decision to engage with CFP or firm
What information must CFP provide no later than the time of the engagement with the client?
- Terms of engagement between client, planner and firm
- Scope of the engagement
- Any limitations to the scope
- The CFP’s responsibilities to implementing, monitoring and updating financial
planning recommendations - CFP must inform client to any material change to info previously presented to client
within 90 days of the occurrence of such an event
*All of this can be presented in one document or a series of documents
What are the CFP’s duties when communicating with a client?
- Provide client with accurate information relating to the engagement
- Respond to client requests in an understandable way
What are the CFP’s duties when representing compensation method?
- May not make misleading claims regarding method of compensation to themself or
the firm - The firm should be able to distinguish between fee only financial planning and fee
based financial planning
What is Fee-Only financial planning?
CFP or firm may not receive any sales-related compensation in any manner
What is Fee-Based financial planning?
Indicates that the CFP or the firm are compensated through both commissions and fees. There is no percentage limit to the amount of sales-related compensation the CFP or firm may collect
What are examples of sales related compensation the CFP or firm might receive?
- Commissions
- 12 b-1 fees
- Trailing commissions
- Bid/ask spreads
- Transaction fees
- Revenue sharing
- Solicitor fees
What other ways may a CFP be compensated that the CFP Board does not deem to be sales related compensation?
- Soft dollars - like research from other firm
- Reasonable fees for custodial or similar administrative services, and fee isnt based on
size of the account - Non-monetary benefits that better enable the CFP to provide services to clients
- Reasonable fees for professional services that aren’t referrals or solicitation fees
- Certain advisory fees relating to Turnkey Asset Management Platform
- A fee that a related solicitor receives for soliciting clients for the CFP or the firm
What is a related party?
A person, business or trust who would receive sales related compensation that could benefit the CFP either directly or indirectly, or benefit the firm.
Who are examples of related parties?
Family members or business entities controlled by any of the following relatives.
- Spouse, former spouse or domestic partner
- Parent, stepparent, aunt or uncle
- Grandparent
- Brother, sister or sibling
- Child, stepchild or grandchild
- Nephews and nieces
- In-laws, son, daughter in law, brother, sister in law
- Cousin
What is safe harbor for related parties?
If the CFP or their firm implements procedures to prevent the CFP or firm from recommending that any client obtain financial assets through a related party, the firm will generally have no requirement to disclose sales related compensation to related parties
What is the requirement for misrepresentations by a CFP’s Professional Firm?
Any CFP who controls the CFP professional’s firm may not allow the firm to represent its compensation method in any way that could be false or misleading
What are the CFP’s duties when recommending other professionals?
- Have a reasonable basis for the recommendation based on the person’s experience,
qualifications and reputation - Exercise reasonable care to protect the client’s best interests
- Disclose to the client no later than the time of the engagement of the other
professional if the recommended professional will or intends to provide economic
benefit to the CFP, firm or a related party in conjunction with a referral
What are the CFP’s duties when recommending, engaging and working with additional persons?
- Communicate with the other financial services professional as to which
responsibilities will be assumed by each and establish the scope of the respective
services for each - When applicable, inform the client in a timely manner if the CFP has reasonable
grounds to believe that the other professional’s services were not performed in an
appropriate manner
What are the CFP’s duties when selecting, using and recommending technology?
- Exercise reasonable judgement and care when selecting, using or recommending
software, a digital advice program or other technology relative to providing services
to a client - Understand the assumptions and outcomes of the selected technology
- Believe, within reason, that the technology produces reliable and objective results
What exceptions are available to the generally prohibited standard of borrowing or lending money and commingling financial assets?
- The client is a member of the CFP professional’s family
- The lender’s normal business entails the business of lending money
*Commingling is always prohibited.
How does the CFP Board define financial planning?
A collaborative process intended to maximize a client’s potential for meeting life goals applying financial advice that considers numerous and relevant aspects of the client’s financial and personal life
What typical elements of the client’s personal and financial circumstances that would affect the development and implementation of the financial plan?
- Identifying and quantifying goals
- Achieving financial security
- Preserving wealth
- Increasing wealth
- Managing cash flow
- Relating assets and liabilities (net worth)
- Identifying and managing risks (insurance/investments)
- Panning for educational needs
- Identifying and address the financial effects of health issues
- Identifying tax planning opportunities
- Preparing for retirement financially
- Pursuing philanthropic objectives
- Panning for estate and legacies
What is a CFP required to do in regards to the practice standards?
- Provide financial planning/advice that integrates relevant elements of the client’s
personal and financial circumstances - Act in the client’s best interest
- Enable the client to perceive the CFP professional will or has provided financial
planning
How does the CFP Board evaluate whether the CFP has or will provide financial planning, and what items must be addressed?
- The number and scope of relevant elements of client’s personal and financial life
- The amount of client’s assets that should be considered relative to the financial advice
- The length of time that financial advice/planning could change as relevant elements of
client’s life may change - The potential risk the client would assume by implementing the financial advice
- Barriers to implementing the financial advice/recommendation
If the CFP Board believes the CFP has failed to apply the practice standards and want to bring disciplinary action, what can the CFP do?
The CFP must demonstrate to the CFP board that they have not engaged to provide financial planning/advice
If the client does not agree to engage the CFP to provide process-driven financial planning, what must the CFP do?
- Decline or Terminate the engagement
- Limit the scope of engagement so that the practice standards would not apply and
communicate services the CFP would not be providing - Provide the requested services following a clear explanation of how financial planning
would benefit the client and how not engaging in financial planning may limit the
CFP’s advice
The CFP Board requires the CFP to document relevant information, what info should be preserved in writing by the CFP?
- The obligation to act in the clients best interest
- The CFP’s policies
- The firm’s procedure
- The significance of the information
What is qualitative data and what are some examples?
Subjective data and generally focuses on the client’s emotions, wishes and hopes.
- Financial goals
- Priorities
- Risk tolerance (risk comfort level)
- Health presumptions
- Life expectancy presumptions
- Family Circumstances
- Ethical and religious values
- Expectations
- Current financial planning actions
What is quantitative data and what are some examples?
Generally factual rather than attitudinal.
- Age
- Dependents
- Other financial, tax and legal advisors
- Income and expenses (cash flow)
- Assets and liabilities (net worth)
- Savings
- Available resources
- Investment accounts amounts and allocations
- Risk capacity
- Government benefits
- Employee benefits
- Amount and allocation of retirement accounts
- Tax exposures
- Insurance coverages and ownership
- Estate plans
If the CFP is unable to obtain the information that is needed to proceed with relationship after reasonable requests, what should the CFP do?
- Terminate the relationship
- Limit the scope of the engagement
When the CFP is identifying reasonable goals what should the CFP do?
Explain to the client how one goal may have a positive or negative impact on another goal
What assumptions are necessary for the client and CFP to agree upon to enable the CFP to proceed with developing the financial plan?
- Inflation rates
- Investment returns
- Life expectancy
- Tax Rates
What should the CFP do if the client has unrealistic goals?
Not agree to such goals, discuss the situation with the client and help the client to select and prioritize the goals that will be followed as the financial planning process moves forward.
When looking at alternative courses of action in developing a plan, what should the CFP recognize?
That each action carries both advantages and disadvantages. Each selection should be based on how it could help the client to achieve stated goals and integrates into clients financial and personal life as a whole
What should each recommendation made by the CFP address?
- The assumptions and estimates agreed upon by the client and professional
- The basis for making the recommendation relative to achieving the client’s goals
- The effects of the recommendation of the client’s financial circumstances
- The effects of the recommendation on the client’s personal life
- How each recommendation impacts other courses of action
- The priority and timing of each recommendation
- Whether the implementation of the recommendation does or not involve
implementation of another recommendation
When monitoring and updating the financial plan what items need to be made clear by the CFP?
- Which products, actions and services are not part of the CFP professional’s monitoring
responsibilities - How and when the CFP will monitor the plan
- The client’s responsibility to notify the CFP professional in a timely manner of any
material changes to client’s information (quantitative or qualitative) - The CFP’s responsibilities relative to updating the plan
- How and when the CFP professional will perform the updates
What is the requirement of the CFP when dealing with subordinates?
They are expected to supervise employees and others who report to them
When must a CFP notify the firm of disciplinary actions?
In a timely manner for any form of public discipline.
- Letters of admonition
- Suspension
- Revocation of the CFP marks
When must the CFP comply with the terms and conditions of the CFP certification?
At all times
What conduct would be deemed adverse to the CFP’s professional integrity, fitness or create a negative perception of the CFP marks or financial planning profession?
- Conviction of a felony or admission into legal program that withholds or defers a
judgement of a felony - Conviction of a relevant misdemeanor (fraud, theft, misrepresentation, 2nd
drug/alcohol offense or dishonest conduct) - A regulatory or civil action ruling of any of the 5 offenses listed above
- Personal bankruptcy filing or adjudication
- A federal tax lien imposed on property owned by the CFP
- A state or local tax lien that the CFP failed to satisfy within a reasonable time
What is the general rule for when charges or convictions of misconduct must be reported to the CFP Board?
Within 30 days
A CFP professional must cooperate in full with requests and investigations for questionable or dishonest behavior that fall under the boards reporting requirement, what are some examples?
- Being cited as a subject whose conduct is deemed to be adverse with the laws or
regulations that apply to the CFP - Had conduct mentioned adversely in a regulatory finding
- Being charged with or convicted of of a felony or relevant misdemeanor
- Been terminated for cause or permitted to resign in lieu of termination when the
cause was dishonesty, unethical behavior or compliance violations
5.Having a professional license suspended, revoked or restricted due to a violation of
rules or conduct standards - Filing for personal bankruptcy or firm bankruptcy when the CFP is the control person
What is the Disciplinary and Ethics Commission (DEC) responsible for?
Responsible for investigating and taking appropriate action regarding alleged violations of the code of ethics and practice standards. Hearing panel volunteers assist the DEC to review specific disciplinary situations and any DEC member must have prior service as a hearing panel volunteer.
What disciplinary actions can the DEC take?
If the CFP is found in violation, the DEC may impose private or public disciplinary actions.
Private: require additional continuing ed or private censure citing
Public: public letter of admonition, suspension for up to five years or permanent
revocation of the marks
Can the CFP appeal the DEC’s decision?
Yes. They must appeal within 30 days of the notice of the adverse ruling by submitting a petition for appeals generally by certified mail and they absorb all of the financial costs related to the appeal.
