Lesson 2 - CFP Board Code of Ethics and Professional Responsibility

Question 1

What does the Code of Ethics and Standards of Conduct reflect?

Answer 1

The commitment that all CFP professionals make to high standards of competency and ethics.

Question 2

When does the CODE apply?

Answer 2

At ALL times. Regardless of whether not giving financial advice and regardless of whether the “Financial Advice” requires “Financial Planning” or not.

Question 3

What’s the cornerstone of the Code and Standards?

Answer 3

A CFP professional’s duty to act as a FIDUCIARY and, therefore, act in the best interests of the Client at all times when providing “Financial Advice.”

Question 4

What is the Code of Ethics?

Answer 4

Think: Code = “the Kid Code” was: Hi-C Drink is the Best, though I Do Care about Conflicting Confidence in other Positive drinks.
○ Act with Honesty, Integrity, Competence, and
Diligence. (Hi-C Drink)
○ 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.

Question 5

What duties apply “at all times” to all parties (clients, firms & subordinates, and the CFP Board)?

Answer 5

To CLIENTS:
• Integrity
• Competence
• Diligence
• Sound and Objective Professional
Judgment
• Professionalism
• Comply with the Law
• Confidentiality and Privacy
• Duties When Communicating with
a Client
• Duties When Representing Compensation
Method
• Duties When Selecting, Using, and
Recommending Technology
• Refrain from Borrowing or Lending Money
and Commingling Financial Assets

To Firms & Subordinates:
• Use Reasonable Care When
Supervising
• Comply with Lawful Objectives
of CFP® Professional’s Firm
• Provide Notice of Public
Discipline

To CFP BOARD:
• Refrain from Adverse Conduct
• Reporting
• Provide Narrative Statement
• Cooperation
• Compliance with Terms and
Conditions of Certification and
Trademark License

Question 6

What extra duties apply when providing “Financial Advice”?

Answer 6

Extra duties only apply “To Clients” (not to Firms & Subordinates or to the CFP Board):
• Fiduciary Duty
• Disclose and Manage Conflicts of Interest
• Provide Information to a Client
• Duties When Recommending, Engaging,
and Working with Additional Persons

Question 7

What extra duties apply when providing “FARFP”?

Answer 7

Extra duties only apply “To Clients” (not to Firms & Subordinates or to the CFP Board):
• The Practice Standards for the Financial
Planning Process
• Information to a Client in Writing

Question 8

What does it mean to act as a Fiduciary and, therefore, act in the best interests of the Client?

Answer 8

3 Things:

• Duty of Loyalty
• Duty of Care
• Duty to Follow Client Instructions

Duty of Loyalty:
A CFP® professional must:
1. Place the interests of the Client above the interests of the CFP® professional and the CFP® Professional’s Firm;
2. Avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the Client, obtain the Client’s informed consent, and properly manage the conflict; and
3. Act without regard to the financial or other interests
of the CFP® professional, the CFP® Professional’s Firm, or any individual or entity other than the Client, which means that a CFP® professional acting under a Conflict of Interest continues to have a duty to act in the best interests of the Client and place the Client’s
interests above the CFP® professional’s.

Duty of Care:
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.

Duty to Follow Client Instructions:
A CFP® professional must comply with the terms of the Client engagement and follow all directions
of the Client that are reasonable and lawful.

Question 9

What is the Financial Advice Framework/Flowchart?

Answer 9

Question 1: Am I providing “Financial Advice?”

• No: No fiduciary duty, but abide by Code of Ethics and other Standards.
• Yes: The Fiduciary Duty applies.

Question 2: If providing “Financial Advice” does it require “Financial Planning”?
-No: No Need to apply Practice Standards for Financial Planning Process.
-Yes: Well does the client agree to engage in Financial Planning:
–No: No need to apply Practice Standards for Financial Planning Process.
–Yes: Apply the Practice Standards for the Financial Planning Process (aka, CGADPIM).

Question 10

What is Financial Advice and what is Not?

Answer 10

Financial Advice:
• 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 with respect to:
- The development or implementation of a
Financial Plan;
- The value of or the advisability of investing
in, purchasing, holding, gifting, or selling
Financial Assets;
- Investment policies or strategies, portfolio
composition, the management of Financial
Assets, or other financial matters; or
- The selection and retention of other persons
to provide financial or Professional Services to
the Client; OR

• The exercise of DISCRETIONARY authority over the
Financial Assets of a Client.

NOT Financial Advice (basically responding to directed orders and marketing):
• A communication that, based on its content, context,
and presentation, would not reasonably be viewed as
a recommendation;
• Responses to directed orders; AND
• The following, if a reasonable CFP® professional
would not view it as Financial Advice:
- Marketing Materials;
- General Financial Education; and
- General Financial Communications.

Note: The determination of whether Financial Advice has been provided is an objective rather than subjective inquiry.

Question 11

What is Financial Planning?

Answer 11

CFP Board’s actual definition: Financial Planning 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.

CFP Board’s criteria:
Financial Planning:
If any of the following is Yes, then it’s Financial Planning and therefore must comply with the “Practice Standards for the Financial Planning Process”:
• Have I agreed to provide or have I provided Financial Planning?
• Does the Client have a reasonable basis to believe I will provide or have provided Financial Planning?
• Does the Financial Advice I agreed to provide require integration of relevant elements of the Client’s personal and/or financial circumstances in order to act in the Client’s best interests, taking into account the Integration Factors below - Think: NFLRB, NFL Running Back
• 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; and
• The Barriers to modifying the actions taken to
implement the Financial Advice.

Question 12

What do you do if the Client doesn’t agree to engage you for Financial Planning?

Answer 12

Pick one of the 4 below:

Not enter into the Engagement; or

Limit the Scope of Engagement to services that do not
require application of the Practice Standards for the
Financial Planning Process, and describe to the Client the services the Client requests that the CFP® professional will not be performing; or

Provide the requested services after informing the Client how Financial Planning will benefit the Client and how the decision not to enter into a Financial Planning engagement may limit the Financial Advice; or

Terminate the Engagement.

Question 13

What are the “Practice Standards for the Financial Planning Process”?

Answer 13

CGADPIM

Question 14

What information must be provided in written form and Orally-or-Written for Financial Advice?

Answer 14

The only thing needed to be written is Privacy. Everything else Orally-or-Written.

Written:
Privacy

Orally-or-Written:
-Material Conflicts of Interest
-Services and Products
-How the Client Pays
-How you, your Firm, and Related Parties are 
  Compensated
-Public Discipline and
-Bankruptcy
-Referral Compensation Arrangements
-Other Material Information

Question 15

What information must be provided in written form and Orally-or-Written for Financial Planning?

Answer 15

The only thing that can be provided Orally-or-in-Writing is Material Conflicts of Interest. Everything has to be in Writing:

Written:
-Privacy Policy
-Services and Products
-How the Client Pays
-How you, your Firm, and Related Parties are 
  Compensated
-Public Discipline and
-Bankruptcy
-Referral Compensation Arrangements
-Other Material Information
-Terms of Engagement (Implementing, Monitoring, and Updating is Required Unless Explicitly Excluded)

Orally-or-Written:
-Material Conflicts of Interest

Question 16

What is the first step of the Planning Practice Standards and what is involved?

Answer 16

CGADPIM
C = Circumstances

STEP 1 – UNDERSTANDING THE CLIENT’S PERSONAL AND FINANCIAL CIRCUMSTANCES

3 sub-bullets:

1) Obtaining Qualitative and Quantitative Information.
A CFP® professional must describe to the Client the qualitative and quantitative information concerning the Client’s personal and financial circumstances needed to fulfill the Scope of Engagement and collaborate with the Client to obtain the information.

-Examples of qualitative or subjective information include the Client’s:
health, life expectancy, family circumstances, values, attitudes, expectations, earnings potential, risk tolerance, goals, needs, priorities, and current course of action.

-Examples of quantitative or objective information include the Client’s:
age, dependents, other professional advisors, income, expenses, cash flow, savings, assets, liabilities, available resources, liquidity, taxes, employee benefits, government benefits, insurance coverage, estate plans, education and retirement accounts and benefits, and capacity for risk.

2) Analyzing Information. A CFP® professional must analyze the qualitative and quantitative information to assess the Client’s personal and financial circumstances.
3) Addressing Incomplete Information. If unable to obtain information necessary to fulfill the Scope of Engagement, the CFP® professional must either limit the Scope of Engagement to those services the CFP® professional is able to provide or terminate the Engagement.

Question 17

What is the 2nd step of the Planning Practice Standards and what is involved?

Answer 17

CGADPIM
G = Goals

Step 2 - Identifying and Selecting Goals

There are 2 sub-bullets:

1) Identifying Potential Goals.
A CFP® professional must discuss with the Client the CFP® professional’s assessment of the Client’s financial and personal circumstances, and help the Client identify goals, noting the effect that selecting a particular goal may have on other goals. In helping the Client identify goals, the CFP® professional must discuss with the Client, and apply, reasonable assumptions and estimates. These may include life expectancy, inflation rates, tax rates, investment returns, and other Material assumptions and estimates.

2) Selecting and Prioritizing Goals.
A CFP® professional must help the Client select and prioritize goals. The CFP® professional must discuss with the Client any goals the Client has selected that the CFP® professional believes are not realistic. Also, the Roadmap says note the impact that selecting a particular goal may have on other goals.

Question 18

What is the 3rd step of the Planning Practice Standards and what is involved?

Answer 18

CGADPIM
A = Analyze

Step 3 - Analyzing the Client’s CURRENT course of action and potential ALTERNATIVE course(s) of action

There are 2 sub-bullets:

1) Analyzing Current Course of Action.
A CFP® professional must analyze the Client’s current course of action, including the material advantages and disadvantages of the current course and whether the current course maximizes the potential for meeting the Client’s goals.

2) Analyzing Potential Alternative Courses of Action.
Where appropriate a CFP® professional must consider and analyze one or more potential alternative courses of action, including the material advantages and disadvantages of each alternative, whether each alternative helps maximize the potential for meeting the Client’s goals, and how each alternative integrates the relevant elements of the Client’s personal and financial circumstances.

Note that a potential alternative course of action does not become a recommendation until the CFP® professional selects it as a recommendation in Step 4 of the process.

Question 19

What is the 4th step of the Planning Practice Standards and what is involved?

Answer 19

CGADPIM
D = Develop

Step 4 - Developing the Financial Planning Recommendation(s)

From the potential courses of action, a CFP® professional must select one or more recommendations designed to maximize the potential for meeting the Client’s goals. The recommendation may be to continue the Client’s current course of action. For each recommendation selected, the CFP® professional must consider the following information:

The assumptions and estimates used to develop the recommendation;

The basis for making the recommendation, including how the recommendation is designed to maximize the potential to meet the Client’s goals, the anticipated material effects of the recommendation on the Client’s financial and personal circumstances, and how the recommendation integrates relevant elements of the Client’s personal and financial circumstances;

The timing and priority of the recommendation; and

Whether the recommendation is independent or must be implemented with another recommendation.

Tips (from Roadmap)

• Sometimes no change is necessary; the
recommendation may be to continue the
Client’s current course of action.
• Document the basis for your recommendations.
• Consider whether to modify previously
selected goals

Question 20

What is the 5th step of the Planning Practice Standards and what is involved?

Answer 20

CGADPIM
P = Present

Step 5 - Presenting the Financial Planning Recommendation(s)

A CFP® professional must present to the Client the selected recommendations and the information that was required to be considered when developing the recommendation(s).

Question 21

What is the 6th step of the Planning Practice Standards and what is involved?

Answer 21

CGADPIM
I = Implement

Step 6 - Implementing the Financial Planning Recommendation(s)

There are 4 sub-bullets:

1) Addressing Implementation Responsibilities.
A CFP® professional must establish with the Client whether the CFP® professional has implementation responsibilities. When the CFP® professional has implementation responsibilities, the CFP® professional must communicate to the Client the recommendation(s) being implemented and the responsibilities of the CFP® professional, the Client, and any third party with respect to implementation.

2) Identifying, Analyzing, and Selecting Actions, Products, and Services.
A CFP® professional who has implementation responsibilities must identify and analyze actions, products, and services designed to implement the recommendations. The CFP® professional must consider the basis for each selection, which must include:
-How the action, product, or service is designed to implement the CFP® professional’s recommendation; and
-The advantages and disadvantages of the action, product, or service relative to reasonably available alternatives.

3) Recommending Actions, Products, and Services for Implementation.
A CFP® professional who has implementation responsibilities must recommend one or more actions, products and services to the Client. The CFP® professional must discuss with the Client the basis for selecting an action, product, or service, the timing and priority of implementing the action, product, or service, and disclose and manage any Material Conflicts of Interest concerning the action, product, or service.

4) Selecting and Implementing Actions, Products, or Services.
A CFP® professional who has implementation responsibilities must help the Client select and implement the actions, products, or services. The CFP® professional must discuss with the Client any Client selection that deviates from the actions, products, and services the CFP® professional recommended.

Question 22

What is the 7th step of the Planning Practice Standards and what is involved?

Answer 22

CGADPIM
M = Monitor

Step 7 - Monitoring Progress and Updating

There are 4 sub-bullets:

1) Monitoring and Updating Responsibilities.
A CFP® professional must establish with the Client whether the CFP® professional has monitoring and updating responsibilities. When the CFP® professional has responsibilities for monitoring and updating, the CFP® professional must communicate to the Client:
-Which actions, products, and services are and are not subject to the CFP® professional’s monitoring responsibility;
-How and when the CFP® professional will monitor the actions, products, and services;
-The Client’s responsibility to inform the CFP® professional of any Material changes to the Client’s qualitative and quantitative information;
-The CFP® professional’s responsibility to update the Financial Planning recommendations; and
-How and when the CFP® professional will update the Financial Planning recommendations.

2) Monitoring the Client’s Progress.
A CFP® professional who has monitoring responsibilities must analyze, at appropriate intervals, the progress toward achieving the Client’s goals. The CFP® professional must review with the Client the results of the CFP® professional’s analysis.

3) Obtaining Current Qualitative and Quantitative Information.
A CFP® professional who has monitoring responsibility must collaborate with the Client in an attempt to obtain current qualitative and quantitative information concerning the Client’s personal and financial circumstances.

4) Updating Goals, Recommendations, or Implementation Decisions.
Where a CFP® professional has updating responsibility, and circumstances warrant changes to the Client’s goals, recommendations, or selections of actions, products or services, the CFP® professional must update as appropriate in accordance with these Practice Standards.

Question 23

What is a Client?

Answer 23

A Client is any person to whom a CFP® professional provides or agrees to provide Professional
Services pursuant to an Engagement.