Lesson 1 of Fundamentals: Ethics, Law and Code of Ethics Flashcards
CFP Board Code of Ethics
A CFP Professional must
- Act with honesty, integrity, competence, and diligence.
- Act in the client’s best interest
- Exercise due care - did what they were supposed to do.
- Avoid or disclosure and manage conflict of interests.
- Maintain confidentiality and protect the privacy of clients’ information.
- Act in a manner that reflects positively on the financial planning profession and CFP Certification.
EXAM TIP: Certificant must follow the letter and the spirit of the code.
Standard of Conducts
A. Duties Owed to the Client
B. Financial Planning and Application of the Practice Standards for the Financial Planning Process
C. Practice Standards for the Financial Planning Process
D. Dutied Owed to the Firm and Subordinates
E. Duties Owed to CFP Board
F. Prohibition on Circumvention
Fiduciary Duty (investment advisors act)
Act in the best interests of the client. Requires professionals to adhere to all objectives, policies, restrictions, and lawful instructions set by the client engagement or client.
Three duties must be filled:
(1). Duty of Loyalty:
- Place the interests of clients above CFP professional and the CFP professional firm.
- Avoid conflict of interests.
- Act without regard to the financial or other interests of the CFP professional the firm, or any entity other then the client.
(2.) Duty of Care:
- Must act with care, skill, prudence (thought), and diligence that a prudent professional would exercise in light of the clients goals, risks, objectives and personal circumstances.
(3.) Duty to follow Clients Instructions:
- Must comply with all objectives, policies, and restrictions. and other terms of the engagement and all reasonable and lawful directions of the client.
Integrity
Key Words:
- Honest
- Upstanding (respectable)
- Candor (open)
Test Tips:
- Allows for innocent mistakes and differences of opinion.
- Does not commit fraud, deceive, or violate the spirit of the rules.
- Doing the right thing.
Competence
Key Words:
- Relevantly Apply Knowledge
Test Tips:
- A CFP Professional does not have to master all areas of planning.
- Gain competence, obtain assistance, limit the engagement, or refer if competence is lacking.
- Contunuing education requirement for CFP certificants 30 hours every two years, including 2 hours of ethics.
- Practice what you know, refer what you don’t.
- Know Limitations
Renew CFP on your birthday month.
Diligence
Key Words:
- Timely
- Thorough
Test Tips:
- Timely is not instant
- Timely allows for the normal course of doing business on the part of the CFP professional.
Disclose and Manage Conflicts of Interests
A material conflict is one that could impact advice given by the CFP professional or cause potential harm.
Key Words:
- Active Consent
- Disclosure
- Manage
- Material Conflict
- Ambiguity
Test Tips:
- Consent does not need to be in writing
- Larger Potential for harm, greater the need for disclosure
- Ambiguity on the side of the client
- Assume financial conflicts are material.
- Divorce and business are examples of a CFP has duties to one client that are adverse to another client.
Disclose Conflicts:
- Compensation
- Limited Product Set
- Proprietary Funds
- Referrals
Manage Conflicts:
- Couple in divorce or in the process of a divorce. You cannot manage both because of a conflict of interest and keep what is best for each.
When does a material conflict of interest exist for a CFP Professional?
- When it could cause harm or impact potential advice.
Practice Question of Disclose and Manage Conflicts of Interest
Samuel, a CFP Certificant, owns a mutual fund for his daughter’s education account and has been happy with the investment performance. If Samuel recommends this fund to a client, must he disclose his ownership in the mutual fund?
a) Yes, because it is a conflict of interest.
b) No, because it is for his daughter, not him.
c) Yes, because it is not suitable for the client.
d) No, because Samuel’s ownership is not material.
Answer: D
Sound and Objective Professional Judgment
Key Words:
- Exercise Judgement
- Not subordinated
Test Tips:
- Do not accept or solicit gifts that could influence judgment
- Fruit Basket: Yes
- Ferrari: No
Professionalism
Key Words:
- Dignity
- Courtesy
- Respect
Test Tips:
- Applies to clients, potential clients and other Financial professionals
Comply with the law
Key Words:
- Laws
- Rules
- Regulations
- Standards
Test Tips:
- Avoid intentionally or recklessly violating laws, rules, regulations or standards by participating or assisting
- Recklessly can apply to making poor referrals
Laws with FINRA, SEC, and state Insurance licensing need to be followed. Other laws of licenses you have.
*Confidentiality and Privacy
Key Words:
- Consent
- Ordinary Business
- Legal and Enforcement Purposes
- Policies
Test Tips:
- Client consent does not need to be in writing
- No absolute confidentiality:
“Ordinary Business”:
- requires consent if we are sharing info for reasons other than ordinary business.
- Necessary for audits,
- CFP Firms and others who are providing services,
- CFP Professionals audits,
- attorneys,
- accountants,
- a person acting in a representative capacity for the client (attorney).
- Any persons or businesses the client has provided oral or written consent. As necessary to provide information to the attorneys, accountants, auditors.
- A client must provide consent before their information can be shared with affiliated firms.
“Legal and Enforcement Purposes”
- does NOT require consent.
- To comply with federal, state, or local law
- Sonpoena
- Defend against wrong doing or civil claim.
- Regulation S-P is for federal laws.
- Inform clients they could have to share information of client without their consent. Legal reasons.
- “Must have policies and processes to protect confidentiality, deliver in writing at or before engagement and every 12 months if they change.
- Carve out on policy delivery for regulation S-P; B/D, Federal converted IRAs.
*Provide Information to a Client
Key Words:
- Financial Advice
- Financial Planning
Test Tips:
- Financial Advice requires seven elements:
- Description, Pay, Compensation, Bankrupcies & Regulatory Events, Conflicts of Interest, Economic Benefit of Referrals, Other Material Information
- Financial Planning is all of the above scopes of Engagement, Limitations, period of services, and Responsibilities.
- Monitoring is assumed unless excluded from the scope of engagement.
- Have to update clients on information that is a material change. 90 days, on webpages. Change of address, change of fee structure.
Duties when communicating with a client
Key Words:
- Reasonable
- Expected to Understand
- Avoid Complexity
Test Tips:
- Ensure client understanding
- Consider multiple forms of communication
Duties when representing compensation
Key Words:
- Fee-Only
- Fee-based
- Sales Related Compensation
- Soft Dollars
- Non Monetary Benefits
- Related Party
Test Tips:
Fee-Only: Direct fees charged to clients or related to financial assets.
- Ex: Hourly fees, flat fees,m subscription fees, assets under management, custodial platform fees, salary or bonus not related to sales or production goals, travel to custodian or research conference (Education element, not based by sales/performance of financial assets, paid for by RIA custodian)
Sales Related Compensation: Commissions, fees or compensations received as a result of selling or recommending a financial asset.
- Ex. Front load, back load, 12b-1 fees, insurance product commissions, sales based non cash travel incentives, salary or bonus based related sales or production goals, direct or indirect beneifts from related entity receiving sales based compensation. (No education element, based on sales/performance of financial assets, paid by broker dealer, insurance company, related entity). Referral Fees, revenue fees, trnasaction fees.
“Fee-Based” = Any combination of elements from Fee Only & Sales Related Compensation.
$.01 of sales-related compensation eliminates the ability to use ‘Fee-Only”
12b-1 Fees are specifically slated as sales-related compensation and fees
Control and compensation from a related party earning sales-related compensation eliminate the ability to use ‘Fee-Only” with a few carve-outs.
“Fee-Based” = Fee & sales related compensation. Stock on insurance policy.
Soft Dollar (research or speaking services supplied by an investment company or B/D) are not sales-related compensation
Related party:
- A person or business entity whose receipt of sales-related compensation a reasonable CFP professional would view as benefiting the CFP professional or the CFP professional’s firm, including the stake in the business entity.
- Family Member: A member of the CFP Professional’s family and any business entity that the family or members of the family controls.
- Business entity: A business entity the CFP or CFP firm controls, that is controlled by or is under common control with, the CFP firm.
How the Client Pays
Provided prior to or at the time of engagement.
Cover all charges and descriptions.
- Product Management Fees
- Surrender chards and sales loads.
Documents that may contain the information.
- ADV Part 2
- Engagement Letter
- Brokerage Agreement
- Offering Documents
- Prospectus
Duties of Recommending, Engaging or Working with Additional Persons
Key Words:
- Reasonable Basis
- Repuation
- Experience
- Qualifications
- Disclosure
- Reasonable Care
Test Tips:
- This standard requires referring on the basis of reputation, experience and qualifications
- Provide disclosure to client if paid a referral fee or given a substantial economic benefit
- Fruit Basket = No need to disclose, Check = Yes, need to disclose.
Duties of Selecting and Using Technology
Key Words:
- Reasonable Care and Judgement
- Level of Understanding
Test Tips:
- Understanding calculations and assumptions
- Understand Monte Carlo Simulation
- Be able to change assumptions
- The client can tell the difference between reaching goals and cash flows.
Refrain from Borrowing or Lending Money and Commingling
Key Words:
- Commingle
- Client Assets
- Borrow
- Lend
Test Tips:
- Client lending/borrowing generally prohibited
- Exception family members, or a legal entity in the business who lend/borrow
- CFP Professionals or their employer cannot commingle with client assets. Pooling financial assets from multiple sources into a common account.
- No prohibition against working with clients who have commingled funds.
(B) Financial Planning and the Application of the Practice Standards
The duties a CFP owes a client deepen if they are engaging in financial planning rather than making recommendations of financial assets. A CFP must follow practice standards if they are performing financial planning but not when recommending or transacting financial assets. The section of the code of ethics and standard of conduct defines, applies, and provide examples of the process of financial planning.
Financial Planning and Client Definitions
Financial Planning:
- It is 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.
Any person, including a natural person, business organization, or legal entity, to whom the CFP professional provides or agrees to provide Professional Services pursuant to an Engagement.
Two examples of transactional relationships include:
*When a client requires analysis, such as creating a balance sheet, cash flow statement, or financial ratio the CFP is likely engaging in Financial Planning. When a client has goals beyond a simple transaction the CFP is likely practicing Financial Planning. The CFP regardless of compensation and business startegy should defer toward considering engagement “financial planning” unless they are certain the engagement is transactional and does not involved quantitative or qualitative analysis.
*Buying compulsory property/causality insurance without other consultation: As long as no quantitative and qualitative analysis.
- A client who contacts a CFP Professional and requires collision and other than collision auto insurance. The CFp can bind and place coverage without. Detailed analysis, especially if the client requests state minimum coverage and is not responsible for fact-finding. The CFP is still held to the Code of ethics, but is not required to follow Financial Planning Practice Standards.
*A Real Estate transaction without analysis or planning:
- A CFP who is also a Realtor may help their clients purchase personal, rental, or commercial property. To the extent the client has asked for representation without financial analysis, a CFP Professional must act ethically, but it not bound by the practice standards.
(C) Financial Planning Process
1.Understanding the Client’s Personal and Financial Circumstances
2.Identifying And Selecting Goals
3.Analyzing the Client’s Current Course of Action and Potential Alternative Courses of Action
4.Developing the Financial Planning Recommendation
5.Presenting to the Financial Planning Recommendations
6.Implementing the Financial Planning Recommendations
7.Monitoring Progress and Updating
Uber Is A Drunk Person’s Immediate Motor vehicle.
Exam Note
A CFP professional is responsible for all steps of the financial planning process unless specifically excluded from the scope of engagement.
CFP professionals must prudently document information as facts and circumstances require (When in doubt, document)
- CRM Software
- Handwritten notes
- Emails
Understanding the Client’s Personal and Financial Circumstances
Key Words:
- Qualitative and Quantitative Information
- Analyze Information
- Address Incomplete Information
- Scope of Engagement
Test Tips:
- Both quantitative and qualitative information are equally important
- Quantitative: Age, Assets, Liquidity, Estate Plans, Cash Flows
- Qualitative: Values: Life Expectancy, Risk Tolerance
- Restrict scope of engagement of necessary information is not provided or available
Data Gathering:
- May be obtained directly from the client, or other sources, interviews, questionnaires, client records, and documents.
- The planner should be an active and engaged listener.
- Four categories of information gathered by the planner include:
- Lists of assets & liabilities
- Dollar values
- Ownership information
- Contractual agreements
Identifying And Selecting Goals
Key Words:
- Identify Goals (Personal & Financial Circumstances –Develop reasonable assumptions (Life expectancy) & estimates (tax rates, investment returns)
- impact of effects on other Goals
- Prioritize Goals
- Which goals are unrealstic
Test Tips:
- Goal selection and prioritization are ongoing throughout the planning process.
- Scarcity of resources impact one another
Analyzing the Client’s Current Course of Action and Potential Alternative Courses of Action
Key Words:
- Current Course of Action
- Advantages & Disadvantages
- Potential Course of Action
- Potential alternatives course of action does not become a recommendation until the CFP professional selects it as a recommendation in step 4 of the action, the development part.
Test Tips:
- Objectively analyze the good and the bad of current and proposed actions.
- Products and strategies are not favored or recommended by the CFP Board, only process. Keep personal bias in check on the exam.
Developing the Financial Planning Recommendation
Key Words:
- Assumptions
- Select one or more recommendations to Maximize Potential to meet goals.
- Basis for making recommendations
- Consider Timing and Priority to meet goals.
- Independent or In concert
- Is recommendation independent or must it be implemented with another recommendation.
Test Tips:
- Select answers that maximize the potential to meet goals (consider cost, liquidity, risk)
- Transactions stand as independent recommendations; Financial Planning most often requires goals to work together.
Recommendations shall be consistent with the following
- Mutually defined scope of engagement
- Mutually defined client goals, needs, and priorities;
- Quantitative data provided by the client
- Personal and economic assumptions
- Practioner’s analysis and evaluation of the client’s current situation; and
- Alternative(s) elected by the practitioner
A recommendation may to just be continuing the current course of action.
Presenting to the Financial Planning Recommendations
Key Words:
- Information
- Developing
Test Tips:
- Present recommendations and discuss with the client before acting on them
- Process > Product
- Present to the client the selected recommendation(s) and the information that was required to be considered on developing the situation.
- Provide advantages and disadvantages of contnuing current plan and any alternative plans.
- Recommendations may be presented orally, in writing, in person, over the phone, or another format if client needs.
- Consider the complexitity of your recommendation when determining the presentation.
- Keep in mind any visual or hearing impairment.
Implementing the Financial Planning Recommendations
Key Words:
- Responsibilities
- Identify
- Analyze
- Advantages
- Disadvantages
Test Tips:
- Different business models put different levels of responsibility on the client and the planner
- Consider stand-alone goals (buying P&C coverage) and those that have to be implemented together (estate planning)
- Process > Product
- Must be completed unless specifically excluded.
- Establish responsibilities of the client, CFP Professional, and any third parties.
- Includes CPA, Attorney, Insurance agent, etc.
- Set timeline and priority.
- Identifying, Analyzing, and Selecting Actions, Products and Services
- Recommending Actions, Products, and Services for Implementation
- Select implementation actions, products, and services.
Implementation in Practice
Select appropriate products and services that are consistent with the client’s goals, needs, and priorities.
Investigate products or services that reasonably address the client’s needs.
Products or services must be suitable to the client’s financial situation and consistent with the client’s goals, needs, and priorities.
Use professional judgment incorporating both qualitative and quantitative information in selecting the products and services that are in the client’s interest.
The planner should use an implementation timeline for all parties.
Client’s Participation
After recommendations are presented
- The client is solely responsible for accepting or rejecting the recommendations
- Once a recommendation is accepted, the planner can move toward implementation.
Monitoring Progress and Updating
Key Words:
- Monitoring Responsibilities
- Progress
- Collaborate
- Update
Test Tips:
- Must establish monitoring duties but not necessarily monitor (if specifically excluded from the scope)
- The CFP board does not state how frequently monitoring or progress updates must take place (states approximate intervals)
- A CFP professional must specifically state they are not monitoring. Otherwise, monitoring is assumed.
Monitoring the Plan:
- Must be completed unless specifically excluded.
- How and when
- Client’s responsibility to update
- Monitor the client’s progress
- Obtain current qualitative and quantitative information.
- Update goals, recommendations, or implementation decisions
- Determine if the terms of engagement are up to date.
Monitoring in Practice
Two types of reviews
- Regular reviews: occur at predetermined intervals.
- Episodic reviews: occur after major, life-changing events.
Investment results should be communicated at least quarterly or monthly during periods of extreme volatility.
Investment management may require more frequent plan reviews. Performance benchmarks should be used at least annually. (risk, return, allocation)
What Marks are Correct?
Your Name, CFP ^ (R)
Followed by One of the Nouns:
- Exam
- Practioner
- Certificant
- Professional
- Mark
- Certification
CERTIFIED FINANCIAL PLANNER ^ (TM) - (ALL CAPS)
Do NOT use as part of email or website
Delivery Methods
Financial Advice vs Financial Planning
Similarities:
- Privacy document MUST be in writing.
- Conflicts of Interest can be oral or in writing
Differences: Below delivery methods
FP: Provided in one or more writtten documents
FA: Privide orally or in writing
Topics of Information Needed to Provide to Clcient:
- Privacy policy
- services and products
- How client pays
- How you, your firm, and related parties, are compensated
- Public discipline and bankrupcy
- Referral compensation arrangements
- Terms of engagement (Implementing, Monitoring and - Updating is Required unless explicity stated)
CFP Professional Duties that Apply
Am I Providing Financial Planning?
(Application of Practice Standards)
A CFP professional must comply with the practice standards, set forth the Financial Planning Process.
