LO 1.1.4: Apply the principles outlined in the CFP Board Code of Ethics and Standards of Conduct to the elements of financial palnning and professional engagements of CFP certificants Flashcards
What are the six subsections of the Standards of Conduct
- Duties Owed to Clients (p. 33)
- Financial Planning and the Application of the Practice Standards for the Financial Planning Process (p. 23-26)
- Practice Standards for the Financial Planning Process (p. 36)
- Duties Owed to Firms and Subordinates (p. 37)
- Duties Owed to CFP Board (p. 38)
- Prohibition on Circumvention (p. 38)
What are the Duties Owed to Clients
1st of the 6 subsections of Standards of Conduct, identifies 15 duties that financial planners owe to clients.
What is the 1st duty owed to clients
Fiduciary Duty (Standard A.1). At all times, when providing Financial Advice to a Client, a CFP professional must act as a fiduciary and therefore, act in the best interest of the Client.
What is required to uphold the fiduciary standard
- Duty of loyalty,
- Duty of care,
- Duty to follow client instructions.
What is the duty of loyalty (fiduciary standard)
- Placing client’s interest ahead of CFP professional, firm, and any other entity; includes
- Avoiding, fully disclosing, obtaining consent, and managing conflicts of interest.
What is the duty of care (fiduciary standard)
Obligated to adhere to terms of engagement and follow “reasonable and lawful” client instructions.
When must the financial planner uphold the fiduciary standard
when providing financial advice, or engaged in financial planning for a client.
What is Integrity (Standards of Conduct)
2nd duty owed to clients in Standards of Conduct. Integrity (Standard A.2), CFP pro must:
- Perform professional services with integrity.
- Integrity demands honesty and candor, which may not be subordinated to personal gain or advantage.
- Antifraud language also included that exists in law and regulation.
What is Competence (Standards of Conduct)
3rd duty owed to clients in Standards of Conduct. Competence (Standard A.3), CFP pro must:
* provide professional services with competence, which means with relevant knowledge and skill to apply that knowledge.
What happens when CFP pro is not sufficiently competent in a particular area to provide professional services
Then CFP pro must:
- gain competence,
- obtain the assistance of a competent professional,
- limit or terminate the engagement, and/or
- refer the client to a competent professional.
What is Diligence (Standards of Conduct)
4th duty owed to clients in Standards of Conduct. Diligence (Standard A.4), CFP pro must:
* respond to reasonable client inquiries, in a timely and thorough manner.
What is Disclose and Manage Conflicts of Interest (Standards of Conduct)
5th duty owed to clients in Standards of Conduct. Disclose and Manage Conflicts of Interest (Standard A.5), CFP pro must:
- Avoid or fully disclose material conflicts of interest by providing sufficiently specific facts.
- Obtain informed consent.
- Manage the conflict of interest.
- Material conflicts that affect professional relationship must be disclosed;
- Must even be disclosed if CFP pro believes acting in client’s best interest.
What is Sound and Objective Professional Judgment (Standards of Conduct)
6th duty owed to clients in Standards of Conduct. Sound and Objective Professional Judgment (Standard A.6), when exercising professional judgment, CFP pro must:
- act objectively to serve client’s interest, rather than themselves, firms, or anyone else.
- may not solicit or accept any gift or consideration reasonably expected to compromise objectivity.
What is Professionalism (Standards of Conduct)
7th duty owed to clients in Standards of Conduct. Professionalism (Standard A.7): this requires CFP professionals to treat others with dignity, courtesy, and respect.
Who does the duty to act with professionalism apply to (Standards of Conduct)
The duty to act with professionalism applies to
- clients,
- prospective clients,
- fellow professionals,
- and others.
What is Comply with the Law (Standards of Conduct)
8th duty owed to clients in Standards of Conduct. Comply with the Law (Standard A.8), CFP pro is:
- required to comply with the laws, rules, and regulations governing professional services
- prohibited from intentionally or wirelessly participating -or- assisting another person’s violation of the Standards or the laws, rules, or regulations governing professional services.
What is Confidentiality and Privacy (Standards of Conduct)
9th duty owed to clients in Standards of Conduct. Confidentiality and Privacy (Standard A.9): CFP pros are required to uphold confidentiality and privacy. There are 2 exceptions:
- Info used for ordinary business purposes
- Info transferred for legal and compliance purposes
What is Provide Information to a Client (Standards of Conduct)
10th duty owed to clients in Standards of Conduct. Provide Information to a Client (Standard A.10): CFP pro must provide accurate information to clients, in an understandable manner and format.
What are Duties When Communicating with a Client (Standards of Conduct)
11th duty owed to clients in Standards of Conduct. Duties When Communicating with a Client (Standard A.11):
- provide client with accurate info in a manner and format client is reasonably expected to understand.
- the info must be provided in accordance with terms of engagement and in response to reasonable client requests.
What does “terms of the engagement” mean
the oral or written agreement, arrangement, or understanding between the CFP professional and the client.
What are Duties When Representing Compensation Method (Standards of Conduct)
12th duty owed to clients in Standards of Conduct. Duties When Representing Compensation Method (Standard A.12):
* Establishes criteria for determining the appropriate compensation method to disclose to clients.
What does “specific representations” mean when representing compensation
CFP pros may only represent their comp in one of two ways:
- fee only -or-
- fee based.
What is fee only compensation
only planning fees (no sales-related compensation).
What is fee based compensation
planning fees + sales-related compensation.
What is sales-related compensation
Defined separately in Standard A.12 and includes:
- commissions
- trailing commissions
- 12b-1 fees
- spreads
- transaction fees
- revenue sharing
- referral or solicitor fees, or similar consideration.
What are Duties When Recommending, Engaging, and Working With Additional Persons (Standards of Conduct)
13th duty owed to clients in Standards of Conduct. Duties When Recommending, Engaging, and Working With Additional Persons (Standard A.13): sets forth requirements for CFP pros who recommend, engage, and work with additional persons.
What must a CFP pro do when engaging or recommending another professional
- have a reasonable basis for the recommendation/engagement based on the other professional’s reputation, experience, and qualifications; and
- disclose any arrangement by which someone other than the client will compensate the CFP pro, the CFP pro’s firm, or a related party for the engagement/recommendation.
For engagements, what must a CFP Professional take reasonable steps to do
For engagements, the CFP professional must take reasonable steps to protect client interests.
What must the CFP pro do when working with another pro on a client’s behalf
- communicate with the other professional about the services each will provide and their respective responsibilities; and
- inform the client in a timely manner if the other professional did not perform the services (in accordance w/scope of services to be provided and allocation of responsibilities).
What are the Duties When Selecting, Using, and Recommending Technology (Standards of Conduct)
14th duty owed to clients in Standards of Conduct. Duties When Selecting, Using, and Recommending Technology (Standard A.14), CFP certificant must:
- have a reasonable basis for believing the tech provides reliable, objective, and appropriate outcomes;
- exercise reasonable care and judgment when selecting, using, or recommending tech; and
- have a reasonable level of understanding the tech’s assumptions and outcomes.
What is Refrain From Borrowing or Lending Money and Commingling Financial Assets (Standards of Conduct)
15th duty owed to clients in Standards of Conduct. Refrain From Borrowing or Lending Money and Commingling Financial Assets (Standard A.15):
- refrain from borrowing or lending money
- commingling assets is prohibited
- borrowing and lending is allowed if client is family or lender is an org or entity in business of lending money
- this standard explicitly prohibits indirect borrowing.
What does refrain from borrowing mean (Standards of Conduct)
CFP pros must refrain from borrowing money, explicitly prohibits indirect borrowing. Exception: Unless the client is a family member.
What does refrain from lending mean (Standards of Conduct)
CFP pros must refrain from lending money. Exception: Lending is allowed if client is an immediate family member or if lender is an org or entity in business of lending money.
What does refrain from commingling financial assets mean (Standards of Conduct)
Commingling of financial assets is prohibited.
What are the Financial Planning and Application of the Practice Standards for the Financial Planning Process (Standards of Conduct)
The Financial Planning and Application of the Practice Standards for the Financial Planning Process are the 2nd subsection of the Standards of Conduct.
- Defines financial planning
- Guidelines for determining when financial planning is required
- Defines relevant elements and integration factors.
What are the Practice Standards for the Financial Planning Process (Standards of Conduct)
3rd subsection of the Standards of Conduct. The Practice Standards are statements describing the elements of the financial planning process, an ongoing process; 7 steps:
- UNDERSTAND- gather quantitative and qualitative data to understand client’s personal and financial circumstances, address incomplete info.
- IDENTIFY- potential goals, select and prioritize goals.
- ANALYZE- current course and potential alternatives.
- DEVELOP- financial planning recommendations.
- PRESENT- financial planning recommendations.
- IMPLEMENT- financial planning recommendations.
- MONITOR- the process, the client’s progress, and update the goals and recommendations.
What are Duties Owed to Firms and Subordinates
4th subsection of the Standards of Conduct:
- Use Reasonable Care When Supervising
- Comply with Lawful Objectives of CFP Professional’s Firm
- Provide Notice of Public Discipline
What are Duties Owed to CFP Board
5th subsection of the 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).
What is Prohibition on Circumvention
CFP professionals are prohibited from using a third party to conduct business that violates the Code and Standards.
