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CFP > General Principles: Chapter 2 > Flashcards

General Principles: Chapter 2 Flashcards

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1
Q

What are the codes of conduct by the CFP Board that took effect on Oct. 1, 2019?

A
  1. Act with integrity, honesty, competence and diligence
  2. Act in the client’s best interest
  3. Exercise due care
  4. Avoid or disclose and manage conflicts of interest
  5. Maintain the confidentiality and protect the privacy of client info
  6. Act in a manner that reflects positively on the financial planning profession and the
    CFP certification
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2
Q

What is the fiduciary standard?

A

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

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3
Q

What is the duty of loyalty?

A

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

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4
Q

What is the duty of care?

A

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

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5
Q

What is the duty to follow client instructions?

A

The CFP is required to comply with the client’s instructions, objectives, policies and restrictions presuming they are reasonable and lawful

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6
Q

Under the Duty of Integrity, what may a CFP not do either directly or indirectly?

A
  1. Deceive or defraud clients and the public in general
  2. Make untrue statements of material facts
  3. Omit a material fact in order to mislead a client or the public in general
  4. 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

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7
Q

What is a CFP required to do under the competence standard?

A
  1. Provide professional services with competence encompassing relevant knowledge
    and skill
  2. 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
  3. Make clear to the client any requested professional services the CFP or firm will not
    provide
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8
Q

Under the Diligence Standard what is the CFP required to do?

A
  1. Provide services in a professional manner
  2. Respond to reasonable client inquiries and requests in a timely fashion
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9
Q

Under the standard to disclose and manage conflicts of interest what is the CFP required to do?

A
  1. Make full disclosure of all material conflicts of interest that could affect the
    relationship with the client
  2. Disclose information relating to conflicts of interest in sufficient detail and
    understandable language
  3. Give detailed disclosure so the client can make an informed decision as to accepting
    or rejecting CFP’s recommendations
  4. CFP must obtain consent of client before providing any financial advice
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10
Q

What are the two requirements of the Sound and Objective Professional Judgement standard?

A
  1. Exercise professional judgement that holds the client’s best interest above the
    planner and/or firm
  2. Refuse any gift or gratuity consideration/payment that could compromise their
    objectivity
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11
Q

What is the Professional Standard for a CFP?

A

Treat other with dignity, courtesy and respect. This includes clients, prospects, colleagues and the general public

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12
Q

What is the Standard to Comply with the Law for a CFP?

A
  1. Comply with laws and rules that apply to CFP’s professional services of financial
    planning
  2. May not intentionally or recklessly participate or assist in another person’s violation of
    such standards, regulations and rules
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13
Q

What are the requirements under the Confidentiality and Privacy Standards for the CFP?

A
  1. Maintain confidentiality regarding any non-public personal information pertaining to
    current, former or perspective clients
  2. 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
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14
Q

What exceptions are there to the confidentiality and privacy standards?

A
  1. To cooperate with law enforcement agencies investigating suspected unlawful
    activities
  2. To comply with federal, state and local law
  3. To cooperate with a duly authorized government investigation
  4. To provide defense to claims for damages lodged by former or current clients
  5. To cooperate with CFP board relative to it’s investigation
  6. To inform relevant professional organizations that must evaluate CFP’s adherence to
    recognized professional standards
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15
Q

What is SEC regulation S-P?

A

SEC has adopted notice requirements and restrictions on a financial institution’s ability to disclose nonpublic personal information about customers.

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16
Q

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?

A
  1. Description of products and services the CFP/firm will provide
  2. 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
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17
Q

What must the CFP inform clients about in regards to issues that may compromise the perception of their reputation?

A
  1. Any disciplinary action relating to the CFP’s professional conduct
  2. Bankruptcy of the CFP or firm
  3. Info from websites of regulators about CFP’s disciplinary history, personal bankruptcy
    or bankruptcy of the firm if the CFP was the control person
  4. Any info that would be material to the client’s decision to engage with CFP or firm
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18
Q

What information must CFP provide no later than the time of the engagement with the client?

A
  1. Terms of engagement between client, planner and firm
  2. Scope of the engagement
  3. Any limitations to the scope
  4. The CFP’s responsibilities to implementing, monitoring and updating financial
    planning recommendations
  5. 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

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19
Q

What are the CFP’s duties when communicating with a client?

A
  1. Provide client with accurate information relating to the engagement
  2. Respond to client requests in an understandable way
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20
Q

What are the CFP’s duties when representing compensation method?

A
  1. May not make misleading claims regarding method of compensation to themself or
    the firm
  2. The firm should be able to distinguish between fee only financial planning and fee
    based financial planning
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21
Q

What is Fee-Only financial planning?

A

CFP or firm may not receive any sales-related compensation in any manner

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22
Q

What is Fee-Based financial planning?

A

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

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23
Q

What are examples of sales related compensation the CFP or firm might receive?

A
  1. Commissions
  2. 12 b-1 fees
  3. Trailing commissions
  4. Bid/ask spreads
  5. Transaction fees
  6. Revenue sharing
  7. Solicitor fees
24
Q

What other ways may a CFP be compensated that the CFP Board does not deem to be sales related compensation?

A
  1. Soft dollars - like research from other firm
  2. Reasonable fees for custodial or similar administrative services, and fee isnt based on
    size of the account
  3. Non-monetary benefits that better enable the CFP to provide services to clients
  4. Reasonable fees for professional services that aren’t referrals or solicitation fees
  5. Certain advisory fees relating to Turnkey Asset Management Platform
  6. A fee that a related solicitor receives for soliciting clients for the CFP or the firm
25
Q

What is a related party?

A

A person, business or trust who would receive sales related compensation that could benefit the CFP either directly or indirectly, or benefit the firm.

26
Q

Who are examples of related parties?

A

Family members or business entities controlled by any of the following relatives.

  1. Spouse, former spouse or domestic partner
  2. Parent, stepparent, aunt or uncle
  3. Grandparent
  4. Brother, sister or sibling
  5. Child, stepchild or grandchild
  6. Nephews and nieces
  7. In-laws, son, daughter in law, brother, sister in law
  8. Cousin
27
Q

What is safe harbor for related parties?

A

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

28
Q

What is the requirement for misrepresentations by a CFP’s Professional Firm?

A

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

29
Q

What are the CFP’s duties when recommending other professionals?

A
  1. Have a reasonable basis for the recommendation based on the person’s experience,
    qualifications and reputation
  2. Exercise reasonable care to protect the client’s best interests
  3. 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
30
Q

What are the CFP’s duties when recommending, engaging and working with additional persons?

A
  1. 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
  2. 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
31
Q

What are the CFP’s duties when selecting, using and recommending technology?

A
  1. 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
  2. Understand the assumptions and outcomes of the selected technology
  3. Believe, within reason, that the technology produces reliable and objective results
32
Q

What exceptions are available to the generally prohibited standard of borrowing or lending money and commingling financial assets?

A
  1. The client is a member of the CFP professional’s family
  2. The lender’s normal business entails the business of lending money

*Commingling is always prohibited.

33
Q

How does the CFP Board define financial planning?

A

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

34
Q

What typical elements of the client’s personal and financial circumstances that would affect the development and implementation of the financial plan?

A
  1. Identifying and quantifying goals
  2. Achieving financial security
  3. Preserving wealth
  4. Increasing wealth
  5. Managing cash flow
  6. Relating assets and liabilities (net worth)
  7. Identifying and managing risks (insurance/investments)
  8. Panning for educational needs
  9. Identifying and address the financial effects of health issues
  10. Identifying tax planning opportunities
  11. Preparing for retirement financially
  12. Pursuing philanthropic objectives
  13. Panning for estate and legacies
35
Q

What is a CFP required to do in regards to the practice standards?

A
  1. Provide financial planning/advice that integrates relevant elements of the client’s
    personal and financial circumstances
  2. Act in the client’s best interest
  3. Enable the client to perceive the CFP professional will or has provided financial
    planning
36
Q

How does the CFP Board evaluate whether the CFP has or will provide financial planning, and what items must be addressed?

A
  1. The number and scope of relevant elements of client’s personal and financial life
  2. The amount of client’s assets that should be considered relative to the financial advice
  3. The length of time that financial advice/planning could change as relevant elements of
    client’s life may change
  4. The potential risk the client would assume by implementing the financial advice
  5. Barriers to implementing the financial advice/recommendation
37
Q

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?

A

The CFP must demonstrate to the CFP board that they have not engaged to provide financial planning/advice

38
Q

If the client does not agree to engage the CFP to provide process-driven financial planning, what must the CFP do?

A
  1. Decline or Terminate the engagement
  2. Limit the scope of engagement so that the practice standards would not apply and
    communicate services the CFP would not be providing
  3. 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
39
Q

The CFP Board requires the CFP to document relevant information, what info should be preserved in writing by the CFP?

A
  1. The obligation to act in the clients best interest
  2. The CFP’s policies
  3. The firm’s procedure
  4. The significance of the information
40
Q

What is qualitative data and what are some examples?

A

Subjective data and generally focuses on the client’s emotions, wishes and hopes.

  1. Financial goals
  2. Priorities
  3. Risk tolerance (risk comfort level)
  4. Health presumptions
  5. Life expectancy presumptions
  6. Family Circumstances
  7. Ethical and religious values
  8. Expectations
  9. Current financial planning actions
41
Q

What is quantitative data and what are some examples?

A

Generally factual rather than attitudinal.

  1. Age
  2. Dependents
  3. Other financial, tax and legal advisors
  4. Income and expenses (cash flow)
  5. Assets and liabilities (net worth)
  6. Savings
  7. Available resources
  8. Investment accounts amounts and allocations
  9. Risk capacity
  10. Government benefits
  11. Employee benefits
  12. Amount and allocation of retirement accounts
  13. Tax exposures
  14. Insurance coverages and ownership
  15. Estate plans
42
Q

If the CFP is unable to obtain the information that is needed to proceed with relationship after reasonable requests, what should the CFP do?

A
  1. Terminate the relationship
  2. Limit the scope of the engagement
43
Q

When the CFP is identifying reasonable goals what should the CFP do?

A

Explain to the client how one goal may have a positive or negative impact on another goal

44
Q

What assumptions are necessary for the client and CFP to agree upon to enable the CFP to proceed with developing the financial plan?

A
  1. Inflation rates
  2. Investment returns
  3. Life expectancy
  4. Tax Rates
45
Q

What should the CFP do if the client has unrealistic goals?

A

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.

46
Q

When looking at alternative courses of action in developing a plan, what should the CFP recognize?

A

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

47
Q

What should each recommendation made by the CFP address?

A
  1. The assumptions and estimates agreed upon by the client and professional
  2. The basis for making the recommendation relative to achieving the client’s goals
  3. The effects of the recommendation of the client’s financial circumstances
  4. The effects of the recommendation on the client’s personal life
  5. How each recommendation impacts other courses of action
  6. The priority and timing of each recommendation
  7. Whether the implementation of the recommendation does or not involve
    implementation of another recommendation
48
Q

When monitoring and updating the financial plan what items need to be made clear by the CFP?

A
  1. Which products, actions and services are not part of the CFP professional’s monitoring
    responsibilities
  2. How and when the CFP will monitor the plan
  3. The client’s responsibility to notify the CFP professional in a timely manner of any
    material changes to client’s information (quantitative or qualitative)
  4. The CFP’s responsibilities relative to updating the plan
  5. How and when the CFP professional will perform the updates
49
Q

What is the requirement of the CFP when dealing with subordinates?

A

They are expected to supervise employees and others who report to them

50
Q

When must a CFP notify the firm of disciplinary actions?

A

In a timely manner for any form of public discipline.

  1. Letters of admonition
  2. Suspension
  3. Revocation of the CFP marks
51
Q

When must the CFP comply with the terms and conditions of the CFP certification?

A

At all times

52
Q

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?

A
  1. Conviction of a felony or admission into legal program that withholds or defers a
    judgement of a felony
  2. Conviction of a relevant misdemeanor (fraud, theft, misrepresentation, 2nd
    drug/alcohol offense or dishonest conduct)
  3. A regulatory or civil action ruling of any of the 5 offenses listed above
  4. Personal bankruptcy filing or adjudication
  5. A federal tax lien imposed on property owned by the CFP
  6. A state or local tax lien that the CFP failed to satisfy within a reasonable time
53
Q

What is the general rule for when charges or convictions of misconduct must be reported to the CFP Board?

A

Within 30 days

54
Q

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?

A
  1. Being cited as a subject whose conduct is deemed to be adverse with the laws or
    regulations that apply to the CFP
  2. Had conduct mentioned adversely in a regulatory finding
  3. Being charged with or convicted of of a felony or relevant misdemeanor
  4. 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
  5. Filing for personal bankruptcy or firm bankruptcy when the CFP is the control person
55
Q

What is the Disciplinary and Ethics Commission (DEC) responsible for?

A

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.

56
Q

What disciplinary actions can the DEC take?

A

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

57
Q

Can the CFP appeal the DEC’s decision?

A

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.

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