Module 5 Flashcards
1
Q
Financial Planning is defined in the Code and Standards as:
A
“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.”
2
Q
The Code and Standards defines Financial Advice as:
A
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.
3
Q
Items that are NOT considered Financial Advice:
A
A communication that, based on its content, context, and presentation, would not reasonably be viewed as a recommendation
Responses to directed orders
The following, if a reasonable CFP® professional would not view it as Financial Advice:
— Marketing materials
— General financial education
— General financial communications
4
Q
Which three questions serve as a check to verify that the client and planner are, in fact, involved in a Financial Planning engagement?
A
Has the planner agreed to provide or provided Financial Planning?
Does the client have a reasonable basis to believe that the planner will provide or has provided Financial Planning?
Does the Financial Advice provided require integration of relevant elements of the client’s personal and financial circumstances in order to act in the client’s best interests, taking into account the Integration Factors?
5
Q
What are Integration Factors?
A
Variables that weigh in determining whether Financial Advice requires Financial Planning.
6
Q
Integration Factors include the following:
A
“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”
“The barriers to modifying the actions taken to implement the Financial Advice”
7
Q
Which guidelines need to be followed in the client-planner relationship at all times?
A
Code of Ethics & Standards of Conduct
8
Q
Which guidelines need to be followed in the client-planner relationship when providing financial advice?
A
Code of Ethics, Standards of Conduct, Fiduciary Duty, & Managing conflicts of interest.
9
Q
Which guidelines need to be followed in the client-planner relationship when financial advice requires financial planning and the client engages?
A
Code of Ethics, Standards of Conduct, Fiduciary Duty, Managing conflicts of interest, & Practice standards for the financial planning process.
10
Q
Disciplinary and Ethics Commission (DEC)
A
The DEC is responsible for investigating, reviewing, considering recommendations, and issuing a final decision in these instances.
11
Q
The CFP Board’s Code of Ethics comprises six principles that apply at all times to individuals holding the CFP® marks. Specifically, the Code of Ethics requires CFP® professionals to do the following:
A
- Act with honesty, integrity, competence, and diligence.
- 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.
12
Q
Standards of Conduct (Standards)
A
A section of the Code and Standards that articulates professional duties that CFP® professionals must uphold.
13
Q
The Standards consists of six subsections:
A
- Duties Owed to Clients
- Financial Planning and Application of the Practice Standards for the Financial Planning Process
- Practice Standards for the Financial Planning Process
- Duties Owed to Firms and Subordinates
- Duties Owed to CFP Board
- Prohibition on Circumvention
14
Q
The Code and Standards state, “At all times when providing Financial Advice to a client, a CFP® professional must act as a fiduciary, and, therefore, act in the best interests of the client.” To uphold the fiduciary standard, the CFP® professional is generally required to fulfill the following three duties:
A
Duty of Loyalty. Involves placing the client’s interests ahead of the CFP® professional, the CFP® professional’s firm, or any other entity. Includes avoiding, fully disclosing, obtaining consent, or managing material conflicts of interest.
Duty of Care. The CFP® professional must engage the client with care, skill, prudence, and diligence. Fulfillment of this duty requires consideration of the client’s goals, risk tolerance, objectives, and circumstances.
Duty to Follow Client Instructions. CFP® professionals are obligated to adhere to the terms of the engagement and must follow “reasonable and lawful” client instructions.
15
Q
A CFP® professional must perform professional services with integrity. Integrity demands:
A
Honesty and candor, which may not be subordinated to personal gain or advantage. The standard also contains the standard antifraud language that exists in law and regulation, the interpretations of which will guide interpretation of this standard.
16
Q
A CFP® professional must provide professional services with competence, which means:
A
With relevant knowledge and skill to apply that knowledge. When the CFP® professional is not sufficiently competent in a particular area to provide the professional services, the CFP® professional must gain competence, obtain the assistance of a competent professional, limit or terminate the engagement, and/or refer the client to a competent professional. The CFP® professional shall describe to the client any requested professional services that the CFP® professional will not be providing.
17
Q
A CFP® professional must provide professional services with diligence, which means:
A
Responding to reasonable client inquiries, in a timely and thorough manner.
18
Q
A CFP® professional must do the following with regards to conflicts of interest:
A
- Avoid or fully disclose material conflicts of interest by providing sufficiently specific facts.
- Obtain informed consent.
- Manage the conflict of interest.
19
Q
CFP® professionals are required to uphold clients’ confidentiality and privacy. There are two exceptions:
A
- Information used for ordinary business purposes (e.g., personal information necessary for an estate planning attorney to draft a will)
- Information transferred for legal and compliance purposes (e.g., subpoenas)
20
Q
This standard establishes criteria for determining the appropriate compensation method to disclose to clients. Fee-only, fee-based, and sales-related compensation categories are defined as follows:
A
Specific representations. CFP® professionals may only represent their compensation in one of the following ways:
– Fee only—only planning fees (no sales-related compensation)
– Fee based—planning fees + sales-related compensation
Sales-related compensation. This is 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.
21
Q
When engaging or recommending another professional, a CFP® professional must:
A
have a reasonable basis for the recommendation or 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® professional, the CFP® professional’s firm, or a related party for the engagement or recommendation.
22
Q
For engagements, the CFP® professional must take reasonable steps to protect the client’s interests. When working with another professional on a client’s behalf, the CFP® professional must:
A
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 with the scope of services to be provided and the allocation of responsibilities.
23
Q
Borrowing & lending money guidelines include:
A
CFP® professionals must refrain from borrowing or lending money. Commingling of financial assets is prohibited. Borrowing and lending is allowed if the client is a member of the CFP® professional’s family or if the lender is a business organization or legal entity in the business of lending money. This standard explicitly prohibits indirect borrowing.
24
Q
Appeals Committee Duties Owed to Firms and Subordinates:
A
Use reasonable care when supervising.
Comply with lawful objectives of the CFP® professional’s firm.
Provide notice of any public discipline enacted by CFP Board.
25
Appeals Committee Duties Owed to CFP Board:
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).
26
There are three types of standards related to investment and retirement advice, which vary depending upon the type of advisor involved:
1. Department of Labor (DOL) fiduciary standard
2. Registered investment advisor (RIA) fiduciary standard
3. Registered representatives (RRs) and agents suitability standard
27
Rules-Based Approach
A rules-based approach to a fiduciary standard is just that, namely a series of rules and guidelines—essentially a checklist of do's and don’ts. There are several challenges with a rules-based approach, especially as the numbers of rules increase. Having numerous rules increases complexity, creates opportunities for possible loopholes, and leads to enforcement issues.
28
Principle-Based Approach
A principle-based approach is a method that uses high-level principles instead of specific rules to guide actions. It allows for flexibility in how the principles are applied, depending on the circumstances of each case.
29
In the case of fiduciary relationships involving investment advisors and clients, the U.S. Supreme Court has described the advisor’s duty as:
“an affirmative duty of utmost good faith, and full and fair disclosure of all material facts” (SEC v. Capital Gains Research Bureau, 375 U.S. 180, 1963).
30
The Investment Advisors Act of 1940 wrote into statutory law the fiduciary duty owed by investment advisors to their clients. The act defines an investment advisor as:
“any person who, for compensation, engages in the business of advising others, either directly or through publications or writing, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.” The act requires investment advisors to register with the SEC by filing Form ADV. In registering, investment advisors must disclose their backgrounds, business affiliations, and the compensation charged for their services.
31
As indicated in Standard A.1 of the Code and Standards, the obligation to look first to the client’s best interests is the fundamental duty owed to the client. It is referred to as:
The duty of loyalty.
Requires that the client’s interests be put ahead of one’s own, and that all actions be made solely for the benefit of the client.
32
The duty of care requires:
The fiduciary to have the competency to give fiduciary advice. This requires a certain level of knowledge and skill to know what is in the best interests of someone setting up a retirement plan or in the best interests of a retirement plan participant.
33
The Uniform Prudent Investor Act (UPIA) identifies five fundamental alterations in the former criteria for prudent investing:
1. The standard of prudence is applied to any investment as part of the total portfolio (all assets) rather than to that investment individually.
2. The tradeoff in all investing between risk and return is identified as the fiduciary’s central consideration.
3. All categorical restrictions on types of investments have been abrogated; the trustee can invest in anything that plays an appropriate role in achieving the risk/return objectives of the trust and meets the other requirements of prudent investing.
4. The definition of prudent investing integrates the requirements that fiduciaries diversify their investments.
5. Delegation of trust investment and management functions is now permitted, subject to safeguards.
34
If a client purchases an investment that pays a generous commission and ongoing fees to the advisor, the fact that the advisor disclosed the fee conflict DOES or DOES NOT fulfill a fiduciary duty to disclose?
Does not.
If there was another investment that essentially did the same thing but had much lower fees, then a fiduciary would recommend that alternative investment because it would be in the client’s best interests to pay less and keep more of any returns.
35
The obligations to know your customer and to investigate the suitability of any products recommended as investments are complementary and fall within the ethical:
Duty to diagnose.
36
New York Stock Exchange (NYSE) Rule 405 stresses the importance of:
Learning all the essential facts about a client and that client’s account.
37
The duty to consult is vital for advisors when
A planning engagement takes them into topic areas where they do not have enough expertise.
38
Because tax laws, product offerings, and the fortunes of individual securities issuers—and, indeed, entire industries—change over time, anyone operating as a professional in the financial services industry has:
An ethical duty to keep current with those developments that affect their clients.
39
The CFP Board’s Fitness Standards
Character and fitness standards for individuals seeking to obtain CFP® certification.
40
The following conduct is unacceptable and will always bar an individual from becoming certified:
Felony conviction for theft, embezzlement or other financially-based crimes.
Felony conviction for tax fraud or other tax-related crimes.
Revocation of a financial (e.g. registered securities representative, broker/dealer, insurance, accountant, investment advisor, financial planner) professional license, unless the revocation is administrative in nature, i.e. the result of the individual determining not to renew the license by not paying the required fees.
Felony conviction for any degree of murder or rape.
Felony conviction for any other violent crime within the last five years.
41
As part of the Fitness Standards, the CFP Board established a list of transgressions that will be presumed to be unacceptable and thus bar certification, unless the Disciplinary and Ethics Commission (DEC) reconsiders and makes a different determination after a review. This list includes the following:
Two or more personal or business bankruptcies.
Revocation or suspension of a non-financial professional (e.g. real estate, attorney) license, unless the revocation is administrative in nature, i.e. the result of the individual determining not to renew the license by not paying the required fees.
Suspension of a financial professional (e.g. registered securities representative, broker/dealer, insurance, accountant, investment advisor, financial planner) license, unless the suspension is administrative in nature, i.e. the result of the individual determining not to renew the license by not paying the required fees.
Felony conviction for non-violent crimes (including perjury) within the last five years.
Felony conviction for violent crimes other than murder or rape that occurred more than five years ago.
42
Respondent
This is any person who has agreed to the CFP Board’s Terms and Conditions of Certification and Trademark License (the “Terms and Conditions”) or Pathway to CFP® Certification Agreement. A person deemed to be a Respondent must comply with the guidelines and processes outlined in the Procedural Rules.
43
Enforcement Counsel
It has “the authority to investigate and issue a Complaint against a Respondent for alleged violations of (a) the Code of Ethics and Standards of Conduct or, where applicable, its predecessors (“Code and Standards”), (b) the CFP® Certification Candidate Agreement, or (c) the Terms and Conditions.”
44
Hearing Panel
When a formal complaint is filed, a hearing takes place before a panel of a minimum of three individuals. At least one member of every hearing panel is a member of the Disciplinary and Ethics Commission (DEC), and at least two members must be CERTIFIED FINANCIAL PLANNERTM professionals. The respondent is entitled to appear in person or telephonically, be represented by counsel at the hearing, cross-examine witnesses, and present evidence on their own behalf.
45
Disciplinary and Ethics Commission (DEC)
The hearing panel submits its findings for review to the DEC for review consideration. The DEC is a peer-review body “composed primarily of CFP® professionals, has the authority to enter a final order that finds facts, determines whether a violation has occurred and, where appropriate, imposes discipline.”
46
Appeals Committee
The “Enforcement Counsel or Respondent may appeal a final order to CFP Board’s Appeals Committee of the Board of Directors (‘Appeals Committee’). The Appeals Committee is composed primarily of CFP® professionals and has the authority to issue CFP Board’s final decision.” The Appeals Committee is composed of up to four members of the Board of Directors (formerly Board of Governors), at least two of whom are first-year members of the Board. Members of the Appeals Committee may not be members of the DEC.
47
The Procedural Rules outline investigation commencement and procedures that the Enforcement Counsel follows. After investigating a given matter, if the Enforcement Counsel finds probable cause, they must take one of the following actions:
Letter of Caution. Dismiss the investigation with a Letter of Caution.
Settlement Offer. Present a Settlement Offer to the DEC.
Complaint. Deliver a Complaint against Respondent.
48
If Enforcement Counsel finds no probable cause, Enforcement Counsel must:
Dismiss the investigation as not warranting further action at this time, while reserving the right to reopen the investigation in the future.” A settlement offer is an option only if probable cause exists.
49
While the investigatory proceedings advance, the Enforcement Counsel may file with the DEC and, at the same time deliver to Respondent a:
Petition for Interim Suspension Order
50
Upon receiving a Petition for Interim Suspension Order, a Respondent subject to an Interim Suspension Order must NOT:
use the CFP Board certification marks, state or suggest that Respondent is a CFP® professional, or hold out to the public as being certified by CFP Board while the Interim Suspension Order is in effect. Within 45 calendar days of delivery of an Interim Suspension Order, Respondent must deliver to Enforcement Counsel evidence of compliance with the Interim Suspension Order.
51
Enforcement Counsel and Respondent may agree on a Settlement Offer, including a proposed Consent Order, that would resolve an investigation, Complaint, or Petition. The parties must file with the DEC a Notice of Settlement Offer within:
two business days of reaching agreement on the Settlement Offer. If either Enforcement Counsel or Respondent does not agree to a Settlement Offer, the investigation will continue or the matter will proceed to hearing.
52
How much time does the Respondent have to acknowledge the receipt of Notice of Investigation from Enforcement Council?
14 calendar days.
53
How much time does the Respondent have to deliver documents/information in response to a Request for Production or Request for Information?
14 calendar days.
54
How much time does the Respondent have to respond to a Request for Admission?
14 calendar days.
55
How much time does the Respondent have to answer to Petition for Interim Suspension and indicates whether Respondent requests a hearing?
14 days.
56
How much time does the Respondent have to provide a written answer to a Complaint?
30 calendar days.
57
How much time does the Respondent have to provide a written answer to an Amended Complaint?
14 calendar days.
58
How much time does the Respondent have to respond to Complaint for Single Bankruptcy?
30 calendar days.
59
How much time does the Respondent have to deliver to Enforcement Counsel evidence of compliance with the Interim Suspension Order?
45 calendar days.
60
How much time does the Respondent have to provide written evidence when subject of a public sanction?
45 calendar days.
61
How much time does the Respondent have to notify CFP Board of any changes to email/mailing address?
Promptly
62
If grounds for discipline have been established, the DEC may impose any of the following forms of sanctions. All disciplinary actions, except private written censure, may be publicly disseminated. Common sanctions include:
1. Private Censure.
2. Public Censure.
3. Suspension.
4. Interim Suspension.
5. Revocation.
6. Temporary Bar.
7. Permanent Bar.
8. Continuing Education or Other Undertakings.
63
Private Censure
A private censure is an unpublished written reproach of Respondent that the DEC delivers to a censured Respondent.
64
Public Censure
A published written reproach of the certificant’s behavior.
65
Suspension
A suspension is a period of time in which Respondent remains subject to the Terms and Conditions but is not Certified or Licensed and is prohibited from using the CFP Board certification marks, stating or suggesting that Respondent is a CFP® professional, or holding out to the public as being certified by CFP Board. The DEC may issue a suspension for a specified period, not less than 90 calendar days or greater than five years.
66
Interim Suspension
An interim suspension is a suspension issued prior to a final order. An interim suspension may be in place for a period not greater than five years.
67
Revocation
A permanent revocation of the right to use the CFP® marks—this is a permanent denial of all rights associated with use of the marks. Revocations normally are published.
68
Temporary Bar
A temporary bar is a period of time in which a Respondent who currently is not a CFP® professional is prohibited from applying for or obtaining CFP® certification.
69
Permanent Bar
A permanent bar is a permanent prohibition on the ability of a Respondent who currently is not a CFP® professional to apply for or obtain CFP® certification.
70
Continuing Education or Other Undertakings
Continuing education that exceeds the minimum certification requirements or other undertakings that the DEC requires. If an Order imposes another sanction on Respondent that CFP Board publishes in accordance with Article 17.7, then CFP Board will include in that publication any requirement for Continuing Education or Other Undertakings.
71
A Respondent whose Certification and License has been suspended for one year or less may file with the DEC Counsel and at the same time deliver to Enforcement Counsel a motion for reinstatement eligibility no earlier than:
30 days prior to the last day of the suspension and no later than five years from the first day of the suspension.
72
Identify the scenario(s) where the Fiduciary Duty must be upheld.
I. When providing Financial Advice
II. When providing Financial Advice that requires Financial Planning
III. When providing Financial Advice that does not require Financial Planning
IV. At all times
A. I only
B. IV only
C. I and II
D. I, II, and III
D. I, II, and III
Explanation: Fiduciary Duty, as described in Standard A.1 of the Code and Standards, must be upheld when providing Financial Advice, even if Financial Planning is not needed. The Fiduciary Duty applies in instances where there is Financial Advice that requires Financial Planning as well.
73
Identify the CORRECT definition of Financial Planning.
A. Financial Planning denotes the process of determining how a client’s financial goals can be met through the proper management of the client’s financial assets.
B. Financial Planning is a process that integrates a client’s life goals with material elements of Financial Planning subject areas.
C. 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.
D. Financial Planning denotes a process that advises clients on meeting life goals through application of the Practice Standards.
C. 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.
Explanation: The answer is 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. This is defined in the Code and Standards.
74
Identify the item that would be viewed as Financial Advice according to the Code of Ethics and Standards of Conduct.
A. Commentary on the Q4 bond market performance
B. Recommendations on customized investment strategies and/or portfolio composition
C. Responses to directed orders
D. Marketing materials
B. Recommendations on customized investment strategies and/or portfolio composition
Explanation: The determination of whether Financial Advice has been provided is an objective rather than subjective inquiry. The more individually tailored the communication is to the client, the more likely the communication will be viewed as Financial Advice. Recommendations on investment strategies and/or portfolio composition will be customized to the client’s personal and financial situation and will likely be considered Financial Advice.
75
Cahdi, a CFP® professional, is enjoying an afternoon at her daughter’s school playground when she is approached by Janet, a fellow parent and teacher at a local elementary school. Their conversation covers specifics about Janet’s personal and financial situation, with emphasis on a recommended investment strategy for her Roth IRA and recent inheritance. As the discussion continues, Cahdi is aware that she is providing Financial Advice to Janet. Identify the correct application of rules from the Code and Standards based on Cahdi and Janet’s interaction.
A. Because only Financial Advice is occurring, Cahdi must uphold only her fiduciary duty.
B. Although only Financial Advice has been determined, Cahdi must uphold her fiduciary duty and must follow the principles of the Code of Ethics.
C. Janet is technically not a client, and the conversation is occurring outside Cahdi’s office; therefore, the Fiduciary Duty and Code of Ethics do not apply.
D. While not necessary, due to the lack of Financial Planning, Cahdi should consider applying important principles from the Code of Ethics in addition to her fiduciary duty.
B. Although only Financial Advice has been determined, Cahdi must uphold her fiduciary duty and must follow the principles of the Code of Ethics.
Explanation: The answer is although only Financial Advice has been determined, Cahdi must uphold her fiduciary duty and must follow the principles of the Code of Ethics. The introduction of the Code and Standards specifically states, “The Code of Ethics applies at all times, and sets forth principles that guide the behavior of CFP® professionals, with elaboration provided in the Standards.” As a CFP® professional, Cahdi is obligated to uphold the principles of the Code of Ethics. In addition, because Financial Advice is occurring, Cahdi must act in accordance with the provisions listed in Standard A.1, Fiduciary Duty.
76
All of the following are integration factors necessary to act in the client’s best interest within a financial planning engagement EXCEPT:
A. the portion and amount of the client’s financial assets that the Financial Advice may affect.
B. the number of relevant elements of the client’s personal and financial circumstances that the Financial Advice may affect.
C. the client’s overall risk tolerance.
D. the effect on the client’s overall exposure to risk if the client implements the Financial Advice.
C. the client’s overall risk tolerance.
Explanation: The answer is the client’s overall risk tolerance. Integration factors include the following:
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
The barriers to modifying the actions taken to implement the Financial Advice
77
Identify the CFP Board requirements that must be fulfilled for a financial planner to be considered a CFP® professional bound to uphold the Code of Ethics.
I. Ethics
II. Examination
III. Experience
IV. Education
A. II only
B. I, III, and IV
C. II, III, and IV
D. I, II, III, and IV
D. I, II, III, and IV
Explanation: All of these are CFP Board requirements that must be fulfilled for a financial planner to be considered a CFP® professional. In addition, there is a one-time, nonrefundable initial certification application fee and a nonrefundable annual certification fee. CFP® professionals are required to complete 30 CE credit hours on each two-year reporting period (28 credit hours of general CE and 2 credit hours of CFP Board-approved ethics CE).
78
Select the principles that are included in the Code of Ethics.
I. Act in the client’s best interests.
II. Maintain the confidentiality and protect the privacy of client information.
III. Exercise due process.
IV. Avoid all conflicts of interest.
A. II only
B. I and II
C. II and IV
D. I, II, III, and IV
B. I and II
Explanation: The six principles of the Code of Ethics are as follows:
1. Act with honesty, integrity, competence, and diligence.
2. Act in the client’s best interests.
3. Exercise due care.
4. Avoid or disclose and manage conflicts of interest.
5. Maintain the confidentiality and protect the privacy of client information.
6. Act in a manner that reflects positively on the financial planning profession and CFP® certification.
79
Identify the principle of the Code of Ethics to which a CFP® professional is adhering by having firm-adopted and implemented policies regarding the protection, handling, and sharing of the client’s nonpublic personal information.
A. Act in the client’s best interests.
B. Avoid or disclose and manage conflicts of interest.
C. Act with honesty, integrity, competence, and diligence.
D. Maintain the confidentiality and protect the privacy of client information.
D. Maintain the confidentiality and protect the privacy of client information.
Explanation: The CFP® professional’s implementation of rules to protect, handle, and share nonpublic client information aligns best with the fifth principle of the CFP Board’s Code of Ethics, “Maintain the confidentiality and protect the privacy of client information.”
80
Regarding the use of technology, a CFP® professional must do which of the following?
I. Have a reasonable basis for believing the technology produces reliable, objective, and appropriate outcomes.
II. Exercise reasonable care and judgment when selecting, using, or recommending technology.
III. Have a reasonable level of understanding of the technology’s assumptions and outcomes.
IV. Become a technology expert.
A. I and II
B. II and III
C. I, II, and III
D. I, III, and IV
C. I, II, and III
Explanation: Statement IV is incorrect; A CFP® professional is not required to become a technology expert. Instead, CFP® professionals are required to act reasonably when using technology.
81
Identify the correctly stated provision included in Standard A.15, Refrain From Borrowing or Lending Money and Commingling Financial Assets.
A. Without exception, CFP® professionals must refrain from borrowing or lending money.
B. Indirect borrowing is permitted.
C. Borrowing and lending is not allowed if the client is a member of the CFP® professional's family.
D. Borrowing and lending is allowed if the lender is a business organization or legal entity in the business of lending money.
D. Borrowing and lending is allowed if the lender is a business organization or legal entity in the business of lending money.
Explanation: According to Standard A.15, CFP® professionals must refrain from borrowing or lending money; however, certain exceptions exist. Borrowing and lending is allowed if the client is a member of the CFP® professional's family, or if the lender is a business organization or legal entity in the business of lending money. This standard explicitly prohibits indirect borrowing.
82
The Duties Owed to CFP Board section, as specified in the Standards of Conduct, requires a CFP® professional to report incidents involving adverse conduct to the CFP Board within:
A. 20 days.
B. 30 days.
C. 45 days.
D. 60 days.
B. 30 days.
Explanation: According to the Duties Owed to CFP Board section, CFP® professionals must report incidents involving adverse conduct to the CFP Board within 30 days.
83
Jessica has been working in the financial services profession for 11 years and has been a CFP® professional for over 5 years. During this time, she has developed into a highly sought-after investment professional who is well versed in retirement and estate planning. Although she has limited knowledge of insurance products, she nonetheless recommends specific insurance products to help her clients reach their goals without consulting an insurance professional. Identify the Standard of Conduct that Jessica is violating.
A. Diligence
B. Professionalism
C. Competence
D. Sound and Objective Professional Judgement
C. Competence
Explanation: Jessica has violated Standard A.3, Competence, by offering recommendations on products outside her area of expertise and professional knowledge. From Standard A.3, Competence, of the Code and Standards: A CFP® professional must provide Professional Services with competence, which means with relevant knowledge and skill to apply that knowledge. When the CFP® professional is not sufficiently competent in a particular area to provide the Professional Services required under the Engagement, the CFP® professional must gain competence, obtain the assistance of a competent professional, limit or terminate the Engagement, and/or refer the Client to a competent professional. The CFP® professional shall describe to the Client any requested Professional Services that the CFP® professional will not be providing.
84
Sarah, a CFP® professional, completed a life insurance application for her client, Chase. When Chase called her two weeks later about the status of the application, Sarah realized she had not submitted it to the insurance company. Which of the following ethical principles has Sarah violated?
A. Standard A.4 (Diligence)
B. Standard A.2 (Integrity)
C. Standard A.6 (Sound and Objective Professional Judgement)
D. Standard A.7 (Professionalism)
A. Standard A.4 (Diligence)
Explanation: Sarah violated Standard A.4 (Diligence) as she did not provide services in a reasonably prompt and thorough manner. From Standard A.4, Diligence, of the Code and Standards: A CFP® professional must provide Professional Services, including responding to reasonable Client inquiries, in a timely and thorough manner.
85
Which approach to implementing the fiduciary standard has been adopted by the CFP Board and RIAs?
A. Process-based approach
B. Rules-based approach
C. Standardized approach
D. Principle-based approach
D. Principle-based approach
Explanation: There are two possible approaches to implementing fiduciary standards: either rules-based or principle-based. The principle-based approach is the current approach instituted by RIAs and CFP® professionals.
86
Which of the following is NOT a component of the Fiduciary Duty (Standard A.1) in the Duties Owed to Clients section of the Standards of Conduct?
A. Duty of Loyalty
B. Duty to Follow Client Instructions
C. Duty to Disclose
D. Duty of Care
C. Duty to Disclose
Explanation: The Code and Standards specify, “At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and, therefore, act in the best interests of the Client.”
To uphold the fiduciary standard as stated in Standard A.1, the CFP® professional is required to fulfill the following three duties:
1. Duty of Loyalty
2. Duty of Care
3. Duty to Follow Client Instructions
87
Identify the transgressions that are presumed to be unacceptable according to the CFP Board’s Fitness Standards.
I. Felony conviction for tax fraud or other tax-related crimes
II. Felony conviction for nonviolent crimes (including perjury) within the last five years
III. Revocation of a financial professional license that is administrative in nature
IV. Two or more personal or business bankruptcies
A. I and II
B. I and III
C. II and IV
D. I, II, and IV
C. II and IV
Explanation: Statement I and Statement III are incorrect. Fitness Standards are set in two categories: (1) conduct that is unacceptable and will always bar an individual from being certified, and (2) conduct that is presumed unacceptable and will bar the individual unless the individual petitions the Disciplinary and Ethics Commission for reconsideration. Conduct that will always bar an individual includes felony convictions for theft, embezzlement, or tax fraud; revocation of a financial professional license (other than revocation for failure to pay fees); or felony conviction for murder, rape, or any violent crime within the last five years. Conduct deemed to be a presumptive bar includes a felony conviction for nonviolent crimes within the past five years or two or more personal or business bankruptcies (regardless of the timeframe). Felony conviction for tax fraud or other tax-related crimes is considered unacceptable conduct and will always bar an individual from becoming certified. Revocation of a financial professional license that is administrative in nature does not impact an individual’s certification prospects.
88
Identify the parties involved in the disciplinary and appeals process that have representation of at least one CFP® professional.
I. Enforcement Counsel
II. Hearing Panel
III. Disciplinary and Ethics Committee
IV. Appeals Committee
A. I only
B. III only
C. I and III
D. II, III, and IV
D. II, III, and IV
Explanation: At least two members of the Hearing Panel must be CFP® professionals. The DEC and Appeals Committee are composed primarily of CFP® professionals.
89
Following consideration of a Respondent’s petition, the Hearing Panel must include which of the following with its recommendation?
I. Factual findings
II. Mitigating factors
III. Aggravating factors
IV. Relevant Anonymous Case Histories
A. I only
B. I and IV
C. II and III
D. I, II, III, and IV
D. I, II, III, and IV
Explanation: The Hearing Panel’s recommendation must include factual findings, any mitigating or aggravating factors, and any Anonymous Case Histories that the Hearing Panel found relevant.
90
All of the following forms of sanctions can be issued to current CFP® professionals EXCEPT:
A. revocation.
B. suspension.
C. permanent bar.
D. private censure.
C. permanent bar.
Explanation: A Temporary Bar and a Permanent Bar are two forms of sanctions that apply to individuals who are not currently CFP® professionals. Current CFP® professionals may be subject to Private Censure, Public Censure, Suspension, and Revocation.
91
Terrance, a CFP® professional, had one of his clients recently file a complaint alleging that he transferred money into unsuitable investments. During the course of the investigation, Terrance was not forthcoming and was uncooperative. All of the following could be grounds for discipline EXCEPT:
A. Terrance failing to respond to a request by the Disciplinary and Ethics Commission without good cause.
B. Terrance obstructing the Disciplinary and Ethics Commission’s performance of its duties.
C. Terrance providing false or misleading statements to the CFP Board.
D. Terrance vehemently disagreeing with the findings against him.
D. Terrance vehemently disagreeing with the findings against him.
Explanation: Expressing disagreement with findings of an investigation would not lead to disciplinary action.
92
According to the CFP Board, which of the following best describe personal financial planning?
I. An investment product used to achieve one's retirement goals.
II. A collaborative process that helps maximize a client's potential for meeting life goals through financial advice.
III. Integrates relevant elements of the client's personal and financial circumstances.
IV. Includes income tax planning, budgeting, insurance planning, asset allocation, and retirement planning.
A. II & III
B. I, II, & III
C. II, III, & IV
D. I, II, III, & IV
C. II, III, & IV
Explanation: Personal financial planning is not a product. It is defined in the CFP Board's Code of Ethics and Standards of Conduct (Code and Standards) as 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 person and financial circumstances." Personal financial planning includes income tax planning, budgeting, insurance planning, asset allocation, and retirement planning.
93
Prudent Investor Rule
Standard of prudence applied to any investment as part of the total portfolio. Trade-off in all investing between risk and return is the fiduciary's central consideration.
94
Identify the following scenario(s) where fiduciary duty must be upheld:
I. When providing financial advice.
II. When providing financial advice that requires financial planning.
III. When providing financial advice that does not require financial planning.
IV. At all times.
A. II only.
B. IV only.
C. I, II, & III
D. I, II, III, & IV
C. I, II, & III
95
Per the Fitness Standards, identify the conduct under which an individual is eligible to submit a petition for consideration:
A. Felony conviction for tax fraud or other tax-related crimes.
B. Two or more personal or business bankruptcies.
C. Felony conviction for any other violent crime within the last five years.
D. Revocation of a financial professional license.
B. Two or more personal or business bankruptcies.
96
In order to proceed with a petition for reinstatement, a Respondent must have done all of the following EXCEPT:
A. Completed the suspension.
B. Completed a CFP Board verified Ethics CE Course.
C. Provided a written certification that Respondent has read, understands, and will comply with the Code and Standards.
D. Paid the reinstatement fee and any outstanding costs owed to CFP board.
B. Completed a CFP Board verified Ethics CE Course.
97
Analyzing the client's current course of action and potential alternative course(s) of action is one of the stages of the personal financial planning process. Which of these tasks typically are completed in this stage?
I. Determining if the current course maximizes the potential to meet client goals
II. Identifying material advantages and disadvantages
III. Recommending specific tax strategies
IV. Identifying how each alternative integrates relevant elements
A) I, II, and IV
B) III and IV
C) I and III
D) I and II
A) I, II, and IV
98
Which of these statements regarding the Standards in the Code and Standards is CORRECT?
I. The Standard of Professionalism requires a CFP® professional to treat Clients, prospective Clients, fellow professionals, and others with dignity, courtesy, and respect.
II. The Standard of Diligence demands honesty and candor, which may be subordinated to personal gain.
A) I only
B) Both I and II
C) II only
D) Neither I nor II
A) I only
99
Choose the requirements that must be fulfilled for a CFP® professional to act as a fiduciary.
I. Engage the client with care, skill, prudence, and diligence.
II. Consider the client's goals, risk tolerance, objectives, and circumstances.
III. Adhere to the Terms of the Engagement and follow 'reasonable and lawful' client instructions.
IV. Avoid, fully disclose, obtain consent or manage Material Conflicts of Interest.
A) III and IV
B) II only
C) I and II
D) I, II, III, and IV
D) I, II, III, and IV
100
According to CFP Board's Standards of Professional Conduct, which one of the following is not expected to be disclosed in writing to a client at the time a client-planner relationship is established?
A) A statement of the basic philosophy of the CFP® certificant (or firm) in working with clients
B) A statement of all sources of income for the CFP® certificant
C) Resumes of principals and employees of a firm who are likely to provide financial planning services to the client
D) A statement as to the method of compensation for the CFP® certificant
B) A statement of all sources of income for the CFP® certificant
101
Select the relevant element.
A) Identify and manage risks
B) Providing a letter of engagement to a Client
C) Specify goals that are unrealistic
D) Refrain from lending money to clients
A) Identify and manage risks
102
Select the phrase that best completes this statement: Relevant elements of personal and financial circumstances
A) should be identified in step 1 of the financial planning process.
B) are the cornerstone of the Code and Standards.
C) are identified in the Practice Standards.
D) vary from Client to Client.
D) vary from Client to Client.
103
Identify the Fiduciary Duty that corresponds to the following definition: "A CFP® professional must act with . . . 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."
A) Duty of Care
B) Duty of Loyalty
C) Duty to Comply
D) Duty to Follow Client Instructions
A) Duty of Care
104
You are a CFP® certificant, and as an integral part of your financial planning business expansion plan, you have recently employed a young woman who is eminently qualified as a paraplanner and is currently studying for the CFP® Certification Examination. However, you notice that she is using the CFP® mark after her name already. Which of the following should you do?
A) Report her immediately to CFP Board
B) Do nothing, because she is not a CFP® certificant.
C) Advise her to cease using the mark immediately.
D) Terminate her employment immediately.
A) Report her immediately to CFP Board
105
Select the categories of conduct defined in the Fitness Standards.
I. Conduct Deemed a Temporary Bar
II. Conduct Deemed a Presumptive Bar
III. Conduct Deemed Unacceptable
IV. Conduct Deemed Adverse
A) II and III
B) I and II
C) II and IV
D) I and III
A) II and III
The answer is II and III. Conduct Deemed Unacceptable and Conduct Deemed a Presumptive Bar are the categories of conduct defined in the Fitness Standards.
106
Per the Fitness Standards, an individual is eligible to submit a petition for consideration after having engaged in any of the following categories of conduct except
A) revocation or suspension of a non-financial professional.
B) two or more personal or business bankruptcies.
C) suspension of a financial professional license.
D) felony conviction for theft, embezzlement or other financially-based crimes.
D) felony conviction for theft, embezzlement or other financially-based crimes.
The answer is felony conviction for theft, embezzlement or other financially-based crimes. An individual with two or more personal or business bankruptcies would receive a presumptive bar according to the guidelines of the Fitness Standards. Conduct leading to a presumptive bar is eligible for a petition for consideration. Felony conviction for theft, embezzlement or other financially-based crimes is deemed unacceptable and will always bar an individual from becoming certified.
107
The Code of Ethics is composed of ____ principles.
A) 3
B) 15
C) 7
D) 6
D) 6
The answer is 6. The Code of Ethics is composed of these six principles:
1. Act with honesty, integrity, competence, and diligence.
2. Exercise due care.
3. Maintain the confidentiality and protect the privacy of client information.
4. Act in the client's best interests.
5. Avoid or disclose and manage conflicts of interest.
6. Act in a manner that reflects positively on the financial planning profession and CFP® certification.
108
Identify the day counting rules that apply when the Procedural Rules state a time in calendar days.
I. Exclude the day of the event that triggers the period
II. Include the day of the event that triggers the period
III. Count every day, excluding intervening Saturdays, Sundays, and federal legal holidays
IV. Include the last day of the period, but if the last day is a Saturday, Sunday, or federal legal holiday, the period continues to run until the end of the next day that is not a Saturday, Sunday, or federal legal holiday
A) II and IV
B) II and III
C) II, III, and IV
D) I and IV
D) I and IV
The answer is I and IV. When the Procedural Rules state a time in calendar days
- exclude the day of the event that triggers the period
- count every day, including intervening Saturdays, Sundays, and federal legal holidays; and
- include the last day of the period, but, if the last day is a Saturday, Sunday, or federal legal holiday, the period continues to run until the end of the next day that is not a Saturday, Sunday, or federal legal holiday.
109
In order to proceed with a petition for reinstatement, a Respondent must have completed all of the following except
A) completed the suspension.
B) completed a CFP Board verified Ethics continuing education (CE) course.
C) paid the reinstatement fee and any outstanding costs owed to CFP Board.
D) provided a written certification that the Respondent has read, understands, and will comply with the Code and Standards.
B) completed a CFP Board verified Ethics continuing education (CE) course.
The answer is completed a CFP Board verified Ethics continuing education (CE) course. The Respondent's Petition must not proceed unless the Respondent has
- completed the suspension;
- provided a properly completed CFP Board Ethics Disclosure Questionnaire;
- provided a written certification that the Respondent has read, understands, and will comply with the Code and Standards;
- paid the reinstatement fee and any outstanding costs owed to CFP Board; and
- otherwise satisfied CFP Board's certification requirements.
110
Choose the Code of Ethics principle that a CFP® professional is following by making clients aware of any arrangement by which someone who is not the client will compensate or provide some other material economic benefit to the planner, firm, or a related party.
A) Exercise due care.
B) Act with honesty, integrity, competence, and diligence.
C) Maintain the confidentiality and protect the privacy of client information.
D) Avoid or disclose and manage conflicts of interest.
D) Avoid or disclose and manage conflicts of interest.
A CFP® professional is required, per the Code of Ethics, to avoid or disclose and manage conflicts of interest. By disclosing any arrangement by which someone who is not the client will compensate or provide some other material economic benefit to the planner, firm, or a Related Party, the planner is upholding the fourth principle of the Code of Ethics: "Avoid or disclose and manage conflicts of interest."
111
Madison, a CFP® professional, offers financial planning services to high net worth clients in her Registered Independent Advisory firm. Which of the services that Madison provides is considered a relevant element of financial planning according to the CFP Board Code and Standards?
A) Uphold fiduciary duty when providing Financial Advice
B) Manage assets and liabilities
C) Avoid or disclose and manage conflicts of interest
D) Maintain confidentiality and privacy
B) Manage assets and liabilities
The answer is manage assets and liabilities. Relevant elements are the components of the Client's personal and financial circumstances that the Financial Advice may affect. Relevant elements vary from Client to Client depending on goals, needs, and overall circumstances. Managing assets and liabilities is a relevant element.
112
Athena, a CFP® professional, offers financial planning services to high net worth clients in her Registered Independent Advisory firm. Select the services that Athena provides that are considered relevant elements of financial planning according to CFP Board's Code and Standards.
I. Managing cash flow
II. Developing client goals
III. Preserving or increasing wealth
IV. Providing for educational needs
A) I, II, III, and IV
B) II and IV
C) I, II, and III
D) III only
A) I, II, III, and IV
The answer is I, II, III, and IV. All of these are considered relevant elements of financial planning according to CFP Board's Code and Standards.
113
Armaan, a CFP® professional, offers financial planning services to ultra-high net worth clients in his Registered Independent Advisory firm. Select the services Armaan provides that are considered relevant elements of financial planning, according to CFP Board's Code and Standards.
I. Achieving financial security
II. Identifying tax considerations
III. Providing high returns on investments
IV. Addressing estate and legacy matters
A) I, II, III, and IV
B) I and III
C) I, II, and IV
D) II, III, and IV
C) I, II, and IV
The answer is I, II, and IV. Providing high returns on investments is not a relevant element. All of the others are considered relevant elements of financial planning, according to CFP Board's Code and Standards.
114
Which of the following is presumed to be unacceptable and thus bar certification unless the Disciplinary and Ethics Commission reconsiders and makes a different determination after a review?
A) Felony conviction for rape
B) Felony conviction for tax fraud
C) Felony conviction for nonviolent crimes within the past five years
D) Felony conviction for embezzlement
C) Felony conviction for nonviolent crimes within the past five years
The answer is felony conviction for nonviolent crimes within the past five years. Candidate fitness standards are set in two categories: conduct that is unacceptable and will always bar an individual from being certified and conduct that is presumed unacceptable and will bar the individual unless the individual petitions the Disciplinary and Ethics Commission for reconsideration. Conduct that will always bar an individual include felony convictions for theft, embezzlement, or tax fraud; revocation of a financial professional license (other than revocation for failure to pay fees); or felony conviction for murder, rape, or any violent crime within the last five years. Conduct deemed to be a presumptive bar includes a felony conviction for nonviolent crimes within the past five years or two or more personal or business bankruptcies (regardless of the time frame).
115
The Code of Ethics is composed of six __________.
A) rules of conduct.
B) Standards.
C) Guidelines.
D) principles.
D) principles.
The answer is principles. The Code of Ethics is composed of these six principles:
- Act with honesty, integrity, competence, and diligence.
- Exercise due care.
- Maintain the confidentiality and protect the privacy of client information.
- Act in the client's best interests.
- Avoid or disclose and manage conflicts of interest.
- Act in a manner that reflects positively on the financial planning profession and CFP® certification.
116
Select the subsections included in Standard A.1, Fiduciary Duty.
I. Duty of Care
II. Duty of Confidentiality
III. Duty to Keep Current
IV. Duty of Loyalty
A) II only
B) III and IV
C) I and IV
D) I, III, and IV
C) I and IV
The answer is I and IV. At all times, when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary and, therefore, act in the best interests of the Client. Standard A.1 identifies three subsections: Duty of Care, Duty of Loyalty, and Duty to Follow Client Instructions.
117
According to the CFP Board Code and Standards, which of the following is considered a relevant element of financial planning?
A) Use of Form ADV, Part 2
B) Collaborate to prioritize goals
C) Clear and understandable Client communications
D) Achieve financial security
D) Achieve financial security
The answer is achieve financial security. Relevant elements are the components of the Client's personal and financial circumstances that the Financial Advice may affect. Relevant elements vary from Client to Client depending on goals, needs, and overall circumstances. A client's plan to achieve financial security is a relevant element.
118
Select the option that is NOT available to the Discipline and Ethics Commission (DEC) when reviewing the Hearing Panel's findings and recommendations.
A) Modify
B) Deny
C) Reject
D) Accept
B) Deny
The answer is deny. During the DEC review and issuance of the final order, the DEC may accept, reject, or modify the Hearing Panel's findings and recommendations.
119
Select the Code of Ethics principle that a CFP® professional is following by acting with 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.
A) Avoid or disclose and manage conflicts of interest.
B) Act with honesty, integrity, competence, and diligence.
C) Exercise due care.
D) Act in a manner that reflects positively on the financial planning profession and CFP® certification.
C) Exercise due care.
The answer is exercise due care. A CFP® professional exercises due care by acting with skill, prudence, and diligence that a prudent professional would use in light of the client's goals, risk tolerance, objectives, and financial and personal circumstances.
120
Select the information that CFP Board is permitted to publish if public discipline is imposed.
I. Confidential information relevant to the discipline
II. Names of family members of the Respondent
III. Name of the Respondent
IV. Form of Discipline
A) III and IV
B) II and IV
C) I, III, and IV
D) I and III
C) I, III, and IV
The answer is I, III, and IV. CFP Board has the right to identify the Respondent and the form of discipline, and provide some or all of the facts, as CFP Board has determined them to be, that CFP Board has determined are relevant to the discipline, including information that otherwise may be private or confidential under the Procedural Rules.
121
Select the requirements defined in Step 7 (Monitoring Progress and Updating) of Practice Standards for the Financial Planning Process.
I. Address monitoring and updating responsibilities
II. Monitor the client's progress
III. Obtain current qualitative and quantitative information
IV. Update goals, recommendations, or implementation decisions
A) I, II, and IV
B) I, II, III, and IV
C) II, III, and IV
D) III only
B) I, II, III, and IV
The answer is I, II, III, and IV. All of these requirements are included in Step 7 (Monitoring Progress and Updating) of Practice Standards for the Financial Planning Process.
122
Identify steps included in CFP Board's Practice Standards for the Financial Planning Process.
I. Monitoring and Updating
II. Identifying and Selecting Goals
III. Establishing and Defining the Client-Planner Relationship
IV. Developing the Financial Planning Recommendation(s)
A) I, II, III, and IV
B) II and IV
C) III and IV
D) I, II, and IV
D) I, II, and IV
The answer is I, II, and IV. Establishing and Defining the Client-Planner Relationship is not included in CFP Board's Practice Standards for the Financial Planning Process.
123
Select the exception(s) to the Confidentiality and Privacy guidelines (Standard A.9) of the Standards of Conduct.
I. Information used for ordinary business purposes (e.g., personal information necessary for an estate planning attorney to draft a will)
II. Information transferred for legal and compliance purposes (e.g., subpoenas)
A) Both I and II
B) II only
C) I only
D) Neither I or II
A) Both I and II
The answer is both I and II. Both of these are correct. A CFP® professional is required to keep confidential and protect the security of personal nonpublic information about clients; however, the Code and Standards sets forth the circumstances when confidential information may be disclosed for 1) ordinary business purposes, or for 2) legal and enforcement purposes.
124
All of these statements comprise the Fiduciary Duty, Duty of Loyalty, except
A) 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.
B) 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.
C) place the interests of the Client above the interests of the CFP® professional and the CFP® Professional’s Firm.
D) act with the care, skill, prudence, and diligence that a prudent professional would exercise.
D) act with the care, skill, prudence, and diligence that a prudent professional would exercise.
"Act with the care, skill, prudence, and diligence that a prudent professional would exercise" is a statement that is found in the Fiduciary Duty, Duty of Care, NOT the Duty of Loyalty.
125
By being competent enough to give advice, even if they delegate or consult with others, CFP® professionals are fulfilling
A) the Duty of Loyalty.
B) the Duty to CFP Board.
C) the Duty of Care.
D) the Duty to Follow Client’s Instructions.
C) the Duty of Care.
A CFP® professional who exercises care, skill, prudence, and diligence to act in the best interests of the Client is fulfilling the Duty of Care requirements described in the Fiduciary standard (Standard A.1). This includes being competent to give advice, even if the CFP® professional delegates or consults with others.
126
Identify the item that would NOT be viewed as Financial Advice according to the Code of Ethics and Standards of Conduct.
A) The exercise of discretionary authority over the Financial Assets of a Client
B) The selection and retention of other persons to provide financial or Professional Services
C) A communication that, based on its content, context, and presentation, would not reasonably be viewed as a recommendation
D) The development or implementation of a Financial Plan
C) A communication that, based on its content, context, and presentation, would not reasonably be viewed as a recommendation
The answer is a communication that, based on its content, context, and presentation, would not reasonably be viewed as a recommendation. The determination of whether Financial Advice has been provided is an objective rather than subjective inquiry. The more individually tailored the communication is to the Client, the more likely the communication will be viewed as Financial Advice. A communication that, based on its content, context, and presentation, would not reasonably be viewed as a recommendation would not be considered Financial Advice.
127
Select the sanction that is an unpublished written reproach of the Respondent that the Discipline and Ethics Commission (DEC) delivers to a censured Respondent.
A) Private Censure
B) Suspension
C) Temporary Bar
D) Public Censure
A) Private Censure
The answer is Private Censure. A Private Censure is an unpublished written reproach of a Respondent that the DEC delivers to the censured Respondent.
128
Which of these is NOT an acceptable compensation method to disclose to clients according to the Duties When Representing Compensation Method (Standard A.12)?
A) Fee-Only
B) Commission-Based
C) Fee-Based
D) Sales-Related
B) Commission-Based
The answer is Commission-Based. Commission-Based is not included as an appropriate compensation method to disclose to clients in Standard A.12. If the compensation method includes commissions, then it should be defined as sales-related compensation.
129
All of the following are Duties Owed to CFP Board specified in the Code and Standards except
A) compliance with the Terms and Conditions of Certification and License.
B) provide a narrative statement to CFP Board on reportable matters.
C) report incidents involving adverse conduct to CFP Board within 60 days.
D) avoid any adverse conduct.
C) report incidents involving adverse conduct to CFP Board within 60 days.
The answer is report incidents involving adverse conduct to CFP Board within 60 days. According to the Duties Owed to CFP Board, CFP Professionals must Report incidents involving adverse conduct to CFP Board within 30 days.
130
Identify the situations in which Standard A.1, Fiduciary Duty, must be upheld.
I. At all times
II. Anytime financial matters are discussed with current or prospective clients
III. At all times when providing Financial Advice
IV. At all times when providing Financial Advice that does not require Financial Planning
A) II, III, and IV
B) I only
C) I and III
D) III and IV
D) III and IV
The answer is III and IV. Per the Code and Standards, "at all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary and, therefore, act in the best interests of the Client." (Standard A.1.) The Fiduciary Duty must be upheld at all times when providing Financial Advice, regardless of whether Financial Planning is required or not.
131
Under specific circumstances, a CFP® professional must act as a fiduciary and, therefore,
A) manage all client matters with prudence and professionalism.
B) analyze the current course of action and potential alternate course(s).
C) act in the Client’s best interests.
D) collaborate with the client to develop S.M.A.R.T. goals.
C) act in the Client’s best interests.
The answer is act in the Client's best interests. At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary and, therefore, act in the best interests of the Client.
132
Brenda and her loan company, SureCash Enterprises, have been Owen's clients since he began his financial planning practice several years ago. Owen, a CFP® professional, would like to purchase new computer equipment. Because she admires Owen, Brenda has offered to loan him money, either personally or through SureCash.
As a rule, under the Standards of Conduct, Owen should not borrow money from his clients. Identify the circumstances that are exceptions to the rule that would allow Owen to borrow money from a client.
I. Brenda personally lends Owen money, and she is his mother.
II. Brenda personally lends Owen money, and their client-planner relationship has existed for more than 10 years.
III. Brenda is a friend and personally makes Owen a loan with a competitive interest rate that is secured by collateral.
IV. SureCash makes a loan to Owen. SureCash is a financial institution in the business of lending money, and the borrowing is unrelated to any professional services performed by Owen.
A) III only
B) II and III
C) I, II, and IV
D) I and IV
D) I and IV
The answer is I and IV. If Brenda is a member of Owen's immediate family, he is allowed to borrow from her. If SureCash is in the business of lending money and the borrowing is unrelated to the financial planning services provided to SureCash, a loan to Owen is permitted. Regarding a loan from a client, the terms of the loan and the duration of the client-planner relationship are irrelevant. Standard A.15, Refrain From Borrowing or Lending Money and Commingling Financial Assets, defines these guidelines and exceptions.
133
Select the group to which CFP Board's Fitness Standards apply.
A) CFP® practitioners
B) CFP® certificants
C) Candidates for the CFP® exam
D) CFP® professionals
C) Candidates for the CFP® exam
The Fitness Standards apply to candidates for the CFP® exam and Professionals Eligible for Reinstatement (PER). PER includes both individuals who are not currently certified but have been certified by CFP Board in the past and individuals are eligible to reinstate their certification without being required to pass the current CFP® Certification Examination.
134
Select the category of conduct defined in the Fitness Standards for which a petition for consideration is NOT permitted.
A) Conduct Deemed a Presumptive Bar
B) Conduct Deemed Unacceptable
C) Conduct Deemed Adverse
D) Conduct Deemed a Temporary Bar
B) Conduct Deemed Unacceptable
The answer is Conduct Deemed Unacceptable. Conduct Deemed Unacceptable is the category of conduct defined in the Fitness Standards under which an individual may not submit a petition for consideration.
135
Sarah, a CFP® professional, is engaged by Betty, who is retiring soon, to provide Financial Advice. Betty has most of her retirement funds invested in her employer’s 401(k) plan. Sarah does not obtain any information about the 401(k) plan because she assumes that there are more investment options available in an individual retirement account (“IRA”) than in Betty’s 401(k) plan. Based on this, Sarah believes Betty’s portfolio would be better off in an IRA. Sarah properly discloses her Material Conflicts of Interest to Betty. Sarah then recommends that Betty take a distribution from her 401(k) plan and roll the assets into an IRA, which Sarah would manage. Sarah intends to analyze and recommend an investment strategy for the IRA after the funds have been distributed to the IRA.
Did Sarah satisfy her Fiduciary Duty?
Sarah did not satisfy her Fiduciary Duty in recommending the distribution and rollover.
At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client. A Client is any person to whom a CFP® professional provides or agrees to provide Professional Services pursuant to an Engagement. Financial Advice includes communications that, based on their content, context, and presentation, would reasonably be viewed as a recommendation to take or refrain from taking a particular course of action with respect to the advisability of investing in, purchasing, holding, gifting, or selling Financial Assets. The Fiduciary Duty includes a Duty of Loyalty, a Duty of Care, and a Duty to Follow Client Instructions.
This case study focuses on the Duty of Care, which requires a CFP® professional to 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.
136
Allison is a CFP® professional who is a registered representative of a broker-dealer. Allison has provided brokerage services to her Client, Mateo, several times over the past three years. Typically, Mateo wants to purchase a specific stock and asks Allison for her opinion before purchasing the stock. Mateo recently asked Allison what she “thought” about Mateo buying a specific stock he intended to purchase. Allison told Mateo that she has looked into the company and that she likes the stock and believes it is undervalued. Mateo then directed Allison to purchase the stock.
Does Allison have a Fiduciary Duty?
Allison has a Fiduciary Duty because she provided Financial Advice when she communicated with Mateo regarding the advisability of purchasing the stock.
At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client. A Client is any person to whom the CFP® professional provides or agrees to provide Professional Services pursuant to an Engagement. Financial Advice includes 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, among other things, the value of or the advisability of investing in, purchasing, holding, gifting, or selling Financial Assets. Financial Assets include securities, insurance products, real estate, bank instruments, commodities contracts, derivative contracts, collectibles, or other financial products.
Mateo asked Allison about a specific stock before making a decision whether to purchase the stock. The content, context, and presentation of this communication makes clear that Mateo was asking for Allison’s recommendation with respect to the advisability of purchasing the stock. When Allison responded to Mateo’s question by saying that she likes the stock and that the stock is undervalued, she made a communication that reasonably would be viewed as a recommendation that Mateo purchase the stock. A stock is an equity security, which is a Financial Asset. Mateo is a Client because Allison provided Financial Advice and related services to Mateo pursuant to an Engagement. Therefore, because Allison made a recommendation to a Client about a Financial Asset, she has provided Financial Advice. Since a Fiduciary Duty arises when a CFP® professional provides Financial Advice to a Client, Allison has a Fiduciary Duty, and was required to act as a fiduciary, and therefore, in Mateo’s best interests, when providing the Financial Advice.
137
Urwa is a CFP® professional who provides asset management services to several Clients. Urwa manages assets in accordance with a standard investment management agreement that she tailors to meet each Client’s investment needs. The agreement gives Urwa discretionary authority to buy or sell securities and to select broker-dealers to execute transactions. Urwa’s firm charges each Client an advisory fee based on the average value of assets held in the account each quarter.
Urwa receives a call from one of her Clients, Joe, who is a novice investor. Joe tells Urwa that he wants to help advance his sister Susan’s career, and he asks Urwa to begin using Susan’s firm to execute trades for his non-qualified investment account. Urwa investigates and has concerns that Susan’s firm may not provide Joe with best execution because the cost of execution using Susan’s firm is higher than other firms where Urwa typically executes trades, and Urwa does not identify an off-setting benefit from using Susan’s firm that would justify the higher fee.
How should Urwa proceed?
Inform Joe that using Susan’s firm to execute transactions may increase transaction costs or otherwise not be advantageous, and thus adversely affect Joe’s investment returns. However, if after receiving this information Joe still wants to make the change, Urwa should begin to direct transactions for his account to Susan’s firm.
At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client. Financial Advice includes the exercise of discretionary authority over the Financial Assets of a Client. The Fiduciary Duty includes a Duty of Loyalty, a Duty of Care, and a Duty to Follow Client Instructions. The Duty of Care requires a CFP® professional to 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. The Duty to Follow Client Instructions requires a CFP® professional to comply with all objectives, policies, restrictions, and other terms of the Engagement and all reasonable and lawful directions of the Client.
In this case, Urwa’s Engagement with Joe gives Urwa discretionary authority over Joe’s Financial Assets. Therefore, Urwa is providing Financial Advice to a Client and must satisfy the Fiduciary Duty. To satisfy the Duty of Care, Urwa must seek best execution of Joe’s account transactions. Urwa has learned that if she uses Susan’s firm, she may not be able to obtain best execution for his transactions. However, Urwa also must satisfy the Duty to Follow Client Instructions. Joe has instructed Urwa to use Susan’s firm for execution because he wants to advance Susan’s career.
Urwa should review her firm’s policies and procedures concerning execution services to determine, for example, whether she is authorized to execute the transaction with Susan’s firm. If there are no firm policies that prevent Urwa from using Susan’s firm to execute the transaction, then Urwa should inform Joe that if she uses Susan’s firm, he may not receive best execution, which could affect Joe’s return on the account or otherwise not be advantageous. If, after being informed of these consequences, Joe still wants Urwa to use Susan’s firm for execution, then Urwa should do so.
138
Darnell, a CFP® professional, and Robert, a relationship manager who is not a CFP® professional, work as members of a team at ABC Financial Services Company. A Client has engaged ABC to provide Financial Advice. Darnell and Robert will be working together to formulate and deliver the Financial Advice. ABC does not have policies that identify the respective roles and responsibilities of the various team members.
As a member of a team, what is Darnell required to do when providing Professional Services to a Client?
Darnell must communicate with Robert about how the responsibilities will be allocated between them and determine the scope of services that each person will provide to the Client.
When a CFP® professional is working as part of a team to provide Financial Advice to a Client, the Duty of Care requires the CFP® professional to communicate with the other members of the team about the scope of their respective services and the allocation of responsibility between them. This might be satisfied by a firm policy or protocol that identifies their respective responsibilities with respect to the services to be provided.
In this case, Darnell, Robert, and any other members of the ABC team who may provide services to the Client will need to decide who will perform each of the services the Engagement requires. The duty that arises in this case is analogous to the Duty When Working With Additional Persons, set forth in (Standard A.13.b.i.) that applies to persons outside the firm who are providing Professional Services to the Client.
139
Trinh, a CFP® professional, works in her firm’s home office, developing Financial Planning recommendations based upon the information that other individuals within her firm collect from Clients. Trinh is developing recommendations for Steven’s Clients, Cindy and Terry. Steven obtains from Cindy and Terry their responses to the firm’s Financial Planning questionnaire and some documents that Steven requested.
Steven sends the documents and questionnaire responses to Trinh and asks Trinh to provide her Financial Planning recommendation(s). Trinh reviews the information and notices that Cindy and Terry have two investment accounts at another firm that constitute a significant portion of their net worth. However, the account statements are two years old and thus are outdated. Trinh’s firm does not have policies and procedures for handling this situation.
What should Trinh do?
Inform Steven that the statements he obtained are outdated and ask him to obtain current information about the two accounts.
In this instance, Trinh is developing Financial Planning recommendation(s) based upon the information that other individuals in the firm have obtained from the Clients. Therefore, Trinh’s ability to fulfill the Scope of Engagement, and to act in the Client’s best interests in accordance with her Fiduciary Duty, depends on the work of her colleagues. When a CFP® professional is working with other individuals within a firm as part of a team that is providing services to a Client, the Fiduciary Duty requires the CFP® professional to take reasonable steps to ensure that the Client is receiving Financial Planning that is in the Client’s best interests.
In this instance, the CFP® professional first should determine whether the CFP® professional’s firm has policies and procedures that apply to the situation. In the absence of such policies and procedures, a CFP® professional should inform the other individual within the firm who is providing services to the Client that the CFP® professional believes that updated financial information may be needed for the CFP® professional to provide Financial Advice that is in the Client’s best interest and explain the basis for the CFP® professional’s belief. The CFP® professional should discuss with the other individual how the services may be provided in the best interests of the Client.
Here, Trinh’s firm does not have policies and procedures for handling this situation. Therefore, Trinh should communicate with Steven to resolve the situation. Trinh should explain to Steven that she does not believe she can develop the Financial Planning recommendation(s) until she has reasonably current information about the two accounts, and recommend that Steven obtain more current information. She also should give Steven the opportunity to explain why it would be reasonable to use outdated statements for the services. If updated information cannot be obtained, and the Client reasonably has directed the firm to proceed with the services based on the information provided, then Trinh may proceed to do so.
140
Imani is expecting her first child and wants to know more about 529 savings plans. Imani decides to share her news with Jeff, the CFP® professional whom she had previously engaged solely to provide investment management. During a 30-minute meeting, Jeff provides an overview of how 529 savings plans work, addresses some of Imani’s general questions about 529 savings plans, and provides a document titled “529 Plans and Other College Savings Options.” Imani thanks Jeff for his time and says she will follow up with him in the next few weeks.
Did Jeff provide Financial Advice when he met with Imani and gave her the 529 savings plan document?
No, because Jeff provided Imani only general financial education materials.
Financial Advice includes 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, among other things, the value of or the advisability of investing in, purchasing, holding, gifting, or selling Financial Assets. The determination of whether Financial Advice has been provided is an objective rather than subjective inquiry. The more individually tailored the communication is to the Client, the more likely the communication will be viewed as Financial Advice. The provision of services or the furnishing or making available of marketing materials, general financial education materials, or general financial communications that a reasonable CFP® professional would not view as Financial Advice, does not constitute Financial Advice.
Here, a reasonable CFP® professional would conclude that when Jeff provided Imani with an overview of how 529 savings plans work, addressed her general questions about 529 savings plans, and provided an educational document on 529 savings plans, Jeff was providing general financial education and not Financial Advice.
141
Kevin, a prospect, met Priya, a CFP® professional, at a community event. Kevin mentioned to Priya that he was planning to retire next year. Priya asked Kevin if she may send him a document her firm prepared that provides an overview of issues to consider when engaging in retirement planning. Kevin agreed. Priya sends Kevin an article titled “What will my savings cover in retirement?” Priya sends this same article to all her Clients and prospects who are within five years of their intended retirement.
In this instance, does Priya have a Fiduciary Duty?
Priya does not have a Fiduciary Duty because she provided only general financial education materials.
In this case, Kevin has not entered into an Engagement with Priya. Therefore, Kevin is not a Client and Priya does not have a Fiduciary Duty to Kevin. In addition, the article that Priya delivered to Kevin, and other prospects, describes comprehensive Financial Planning and provides an overview of issues to consider when engaging in retirement planning. The article provides financial information that is generally applicable and reasonably would be viewed as general financial education materials. Therefore, Priya has not provided Financial Advice by sending the article to Kevin. However, to satisfy the Duty of Integrity, which applies whenever a CFP® professional is performing Professional Services, the material that Priya sent to Kevin, like all communications, must not be untrue or omit a material fact that is necessary to make the statements made not misleading.
142
Meghan is a CFP® professional who is a registered representative of a broker-dealer. Meghan has a longtime Client, Ted, to whom she provides episodic brokerage services with no responsibility to monitor the brokerage account. Ted contacts Meghan and asks whether Meghan’s firm has a research report regarding a specific stock he is considering purchasing. Meghan provides Ted a research report on the stock that her firm prepared. The research report states that the stock is undervalued. Meghan tells Ted that she has not analyzed the stock and is not making a recommendation as to whether Ted should or should not purchase the stock. Ted reviews the research report and then directs Meghan to purchase the stock for him.
Which of the following best describes Meghan’s duty when purchasing the stock for Ted?
Meghan does not have a Fiduciary Duty with respect to Ted’s decision to purchase the stock because she did not provide Financial Advice – Meghan did not recommend that Ted purchase the stock.
In this circumstance, Ted is Meghan’s longtime Client. Meghan responded to Ted’s question by providing a research report that her firm prepared. The research report was not individually tailored to Ted’s personal and financial circumstances. Meghan also mentioned to Ted that she has not analyzed the stock and is not making a recommendation as to whether Ted should or should not purchase the stock. The content, context, and presentation make clear that Meghan did not recommend that Ted purchase the stock when she provided the research report to Ted. Meghan also did not provide Financial Advice to Ted when Ted requested that Meghan purchase the stock for him. The duty to act as a fiduciary arises when a CFP® professional provides Financial Advice to a Client. Since Meghan did not provide Financial Advice, she was not required to act as a fiduciary with respect to Ted’s decision to purchase the stock. If, however, Meghan had a reasonable basis to believe that the transaction was not in Ted’s best interests, then Meghan would have an obligation under the Code of Ethics to inform Ted that his suggested course of action is not in his best interests, Meghan’s reasons therefore, and the possible consequences of taking the course of action.
143
Holly, a CFP® professional, has an Engagement with Pat to provide Financial Advice addressing long-term investing for retirement and other needs later in life. Pat indicates that he is socially conscious and would be interested in investing in companies that are consistent with his views. Holly tells Pat that there are environmental, social, and corporate governance (“ESG”) mutual funds that are consistent with Pat’s goals. Pat responds that he would like to see what those look like.
Holly collects information about Pat’s goals, risk tolerance, objectives, and financial and personal circumstances. She then develops an appropriate asset allocation and begins reviewing ESG investments that would fill the allocations for the asset classes. As she does that work, Holly discovers that, in two of the asset classes, while ESG funds are available, the ESG funds for those asset classes are not funds that Holly, based on her analysis, believes are the best available options for Pat.
What should Holly do to fulfill her Fiduciary Duty?
Review her conclusions with Pat, explain the reasons why she would not recommend the funds, and ask Pat whether he would be interested in considering non-ESG investments.
When a CFP® professional realizes that the Client’s suggested course of action is not, in the CFP® professional’s judgment, in the Client’s best interests, the CFP® professional must fulfill the Duty of Care and the Duty to Follow Client Instructions by informing the Client of that conclusion, the CFP® professional’s reasons therefore, and the possible consequences of taking the course of action. If the Client specifically directs the CFP® professional to follow instructions that are reasonable and lawful, then the CFP® professional is obligated to follow those instructions. When a CFP® professional cannot identify prudent recommendations due to Client restrictions, the CFP® professional must exercise due care in selecting from among the pool of investments that comply with the Client direction.
In this case, Pat merely has indicated an interest in ESG funds and has not specifically directed Holly to invest exclusively in ESG funds. Holly should review her conclusions with Pat, explain the reasons why she normally would not recommend ESG funds in this circumstance, and ask Pat whether he would prefer to invest in the ESG funds or consider non-ESG investments. If Pat directs that only ESG funds be used for his account, then Holly should follow those instructions and select the ESG funds in these categories that she reasonably believes are the best available options.
144
Emma, a CFP® professional, receives a call from her Client, David, who is approaching retirement age. David asks Emma whether he should invest in a real estate investment trust (REIT) to fund his retirement income. To invest in the REIT, David would need to liquidate a portion of the assets held in his investment account, which Emma manages, and purchase the REIT through another account. Emma conducts her analysis and concludes that investing in the REIT is a bad idea because, among other reasons, the account she is managing likely will achieve better returns than an investment in the REIT. Emma analyzes David’s investment time horizon and concludes that the commission she would receive on the purchase of a REIT investment would be less than the management fee she would earn if the assets remained in David’s investment account. The account that would hold the REIT would not pay Emma a management fee.
What should Emma do?
Fully disclose to David her Material Conflict of Interest, obtain informed consent to the conflict, and provide David with her advice.
In this case, Emma has a Material Conflict of Interest because she will earn more compensation if David accepts her recommendation. The fee that Emma would receive if she continued to manage David’s investment account will be greater than the commission she would receive if he purchased the REIT. Emma must make full disclosure to David of the compensation conflict before or when making the recommendation and obtain David’s informed consent to the conflict.
While the Duty to Disclose Conflicts does not require written disclosure, evidence of oral disclosure of a conflict will be given such weight as CFP Board in its judgment deems appropriate. As a best practice, CFP Board recommends that a CFP® professional disclose the Conflict of Interest in writing before or when providing the Financial Advice.
145
Olivia, a CFP® professional, identifies three single premium annuities that will best meet the needs of her Client, Michael. One of the three annuities Olivia identified is issued by a life insurance company (DEF Mutual, Inc.) that is affiliated with Olivia’s firm (DEF Advisers, Inc.). While Olivia will receive the same compensation if Michael purchases any of the three annuities, her firm and her firm’s affiliate will receive an additional economic benefit if Michael purchases the DEF Mutual annuity.
How should Olivia proceed?
Olivia should disclose to Michael that one of the insurance companies is affiliated with her firm and that if Michael purchases an annuity from that insurance company, Olivia’s firm and an affiliate of Olivia’s firm will receive an additional economic benefit on that transaction.
In this case, the affiliation between Olivia’s firm and the insurance company that issued the annuity, and the fact that Olivia’s firm and an affiliate of Olivia’s firm will receive an additional economic benefit if Michael purchases an annuity from that insurance company, are Material Conflicts of Interest. As a result, Olivia must make full disclosure of the potential additional economic benefit that will result if Michael purchases the annuity from the affiliate and obtain Michael’s informed consent to the Material Conflict of Interest before or when recommending the annuity issued by the affiliate.
146
Mildred is a CFP® professional employed by Alpha Advisory Services, Inc. (“Alpha”), a registered investment adviser. Mildred tells Thomas, a client of Alpha, that her compensation method is “fee-only.” Thomas asks Mildred for investment recommendations. Mildred gathers the information that she needs, conducts an appropriate analysis, and recommends that Thomas invest in an Alpha-approved family of mutual funds after making the required disclosures. Thomas is pleased with Mildred’s recommendation and directs her to make the investment. The only compensation that Mildred receives is a salary from Alpha. Mildred does not receive any additional compensation when Thomas invests in the mutual fund. Although her firm discloses the information to Clients, Mildred does not realize that Alpha receives revenue sharing payments from the mutual funds she recommends, including the Alpha-approved family of mutual funds in which Thomas has invested.
Has Mildred complied with the Duties When Representing Compensation Method?
No. Mildred may not refer to her compensation method as “fee-only” because her firm, Alpha, receives revenue sharing payments from mutual funds.
Sales-Related Compensation is defined as more than a de minimis economic benefit, including any bonus or portion of compensation, resulting from a Client purchasing or selling Financial Assets, from a Client holding Financial Assets for purposes other than receiving Financial Advice, or from the referral of a Client to any person entity other than the CFP® Professional’s Firm.
Here the revenue sharing payments are Sales Related Compensation because they are more than a de minimis economic benefit that results from the Client purchasing an investment in the mutual fund. Mildred may not refer to her compensation method as “fee-only” because her firm will receive Sales-Related Compensation. Mildred’s failure to know that her firm receives Sales-Related Compensation does not excuse her representation that her compensation method is “fee-only.” Whether a CFP® professional may represent his or her compensation as “fee-only” depends on the objective facts, not on his or her subjective beliefs. Mildred is responsible for knowing whether she or her firm receives Sales-Related Compensation, and whether any Related Parties receive Sales-Related Compensation in connection with any Professional Services she or her firm provides to Clients.
147
Bob is 50 years old. He is divorced with no children and rents his home. His only significant assets are $300,000 invested in a bank savings account and $200,000 that has accumulated in his firm’s 401(k) plan. He asks Gina, a CFP® professional, to manage the assets currently held in his bank savings account, manage his cash flow, and plan for his retirement. Bob also tells Gina that he wants to focus on his long-term financial outlook. They agree that Gina will develop recommendations for the assets currently invested in the bank savings account, make cash flow recommendations, and develop long-term planning scenarios that include retirement projections. Gina and Bob enter into an investment advisory agreement so that Gina can manage the assets currently invested in Bob’s bank savings account.
Is Gina providing Financial Advice that requires Financial Planning?
Yes, Gina is providing Financial Advice that Requires Financial Planning.
In this case, there are insufficient facts to conclude that the written Engagement contains language requiring Gina to provide Financial Planning, or that Bob has a reasonable basis to believe that Gina will provide Financial Planning. Therefore, whether Gina must comply with the Practice Standards for Financial Planning Process depends on whether Gina’s Financial Advice requires integration of relevant elements of Bob’s personal and/or financial circumstances.
148
Kimani, a CFP® professional, distributes a flyer inviting prospects to attend a Financial Planning Seminar. At the event, Kimani places a sign at the entrance that states: “What Financial Planning Can Do For You.” Daniel, a prospect, attends the event.
At an in-person meeting the following week, Daniel tells Kimani that he wants to be a Financial Planning Client, with a specific focus on retirement planning. Kimani asks Daniel to complete an investment risk profile questionnaire. Kimani does not clearly inform Daniel that she would not be providing Financial Planning. Kimani reviews Daniel’s answers and, rather than providing Financial Planning, Kimani solely makes an investment recommendation.
Is Kimani required to comply with the Practice Standards for the Financial Planning Process, and therefore, provide Financial Planning?
Kimani is required to comply with the Practice Standards for the Financial Planning Process because Daniel has a reasonable basis to believe that Kimani will provide or has provided Financial Planning.
Although Daniel’s Engagement does not specify that Kimani will provide Financial Planning, Daniel has a reasonable basis to believe that Kimani will provide or has provided Financial Planning: Kimani invited Daniel to a Financial Planning seminar; Daniel told Kimani that he wanted Financial Planning; Kimani advised Daniel how to invest; and Kimani did not clearly inform Daniel that she would not be providing Financial Planning. Under other facts or circumstances, the application of the Practice Standards for the Financial Planning Process may produce a different result. In addition, since Kimani is required to provide Financial Planning to Daniel, some of the information that she may have provided to Daniel orally when providing Financial Advice now must be delivered to Daniel in writing.
149
Juan, a CFP® professional, receives a call from prospective clients Cristabella and Miguel. They are expecting their first child and want to begin to save for the child’s education. Juan sends Cristabella and Miguel a questionnaire, which they complete and return to Juan, requesting personal information such as their names, ages, net worth, income, and risk profile. Juan schedules a meeting to better understand their personal and financial circumstances. After the meeting, Juan uses his education funding calculator to prepare an education funding analysis applying a balanced risk tolerance that is consistent with Cristabella and Miguel’s answers on the questionnaire. Juan agrees to examine in-state and out-of-state college costs and determine the monthly amount they would need to save to fund the education goal for either an in-state or out-of-state educational institution.
Is Juan required to provide Financial Planning to Cristabella and Miguel?
No, Juan is not required to provide Financial Planning to Cristabella and Miguel.
In this circumstance, there is no explicit agreement for Juan to provide Financial Planning to Cristabella and Miguel. In addition, Cristabella and Miguel do not have a reasonable basis to believe Juan will provide or has provided Financial Planning. Therefore, the issue is whether Juan’s Financial Advice requires integration of relevant elements of Cristabella and Miguel’s personal and/or financial circumstances in order to act in Cristabella and Miguel’s best interests, such that Juan is required to provide Financial Planning to Cristabella and Miguel.
150
Susan is dissatisfied with her investment manager’s performance and costs and wants to work with a CFP® professional. She is referred to Blaine. After meeting with Susan and reviewing the information she provided, Blaine determines that Susan needs investment management and retirement planning. Financial Advice in these areas would affect almost all of Susan’s Financial Assets. To provide Susan with investment management and retirement planning, Blaine also determines that he would need to perform cash flow and budgeting, estate planning, and insurance planning to act in Susan’s best interests. Under those circumstances, Blaine would be agreeing to provide Financial Advice that Requires Financial Planning, and thus would be required to comply with the Practice Standards for the Financial Planning Process. However, Susan tells Blaine that she does not want to engage Blaine to provide Financial Planning. Blaine determines that if he were to limit the Scope of the Engagement to investment management, he would not be required to provide Financial Planning.
Which is the best course of action?
Blaine may Limit the Scope of the Engagement to investment management and inform Susan that he will not be performing retirement planning.
In this case Blaine has determined that Susan had requested Financial Advice that Requires Financial Planning, but Susan does not want to engage Blaine for Financial Planning. Therefore, there are four options available to Blaine. One of those options is to limit the Scope of the Engagement to services that do not require application of the Practice Standards and describe to the Client the services the Client requests that the CFP® professional will not be performing. Therefore, Blaine may Limit the Scope of the Engagement to investment management and inform Susan that he will not be performing retirement planning.
151
Rick, a CFP® professional, has presented his Financial Planning recommendations to his Clients Mike and Sofia. He previously informed the Clients of his Material Conflicts of Interest, explained how he will manage the conflicts, and obtained the Clients’ informed consent. His Financial Planning recommendations include obtaining additional term life insurance and reallocating their retirement savings to investment products that are designed to maximize their potential to meet long-term goals. Rick explains to his Clients that he implements recommendations relating to investment products, for which he charges an ongoing management fee. For the implementation of other recommendations, Rick communicates with his Clients their responsibility and the responsibilities of any third-party.
What should Rick do next to comply with the Practice Standards for the Financial Planning Process?
Discuss with his clients the basis for selecting an action, product, or service, and the timing and priority of implementing the action, product, or service.
In this case, Rick has already disclosed his Material Conflicts of Interest and how he will manage those conflicts. Therefore, the next step is for Rick to discuss with his Clients the basis for selecting an action, product, or service, and the timing and priority of implementing the action, product, or service.
152
Fiduciary Duty = ? + ? + ?
Duty of Loyalty + Duty of Care + Duty to Follow Client Instructions
153
What document must be provided in writing regardless of if a CFP professional is giving advice or is providing financial planning?
Privacy Policy
154
What can be provided in writing or orally regardless of if a CFP professional is giving advice or is providing financial planning?
Material Conflicts of Interest
155
James, a CFP® professional, participates in an investment club called Stock Talks. Before the meeting, each club member conducts independent research on the fundamentals of a specific company and presents key conclusions and analysis on the monthly videoconference. General observations on the stock and economy are offered at each meeting. Occasionally, the club members explore planning scenarios in which the presented stock would fulfill a stated need.
What are the applicable guidelines?
Code of Ethics & Standards of Conduct (that apply at all times)
By participating in the Stock Talks club, James is providing general investment-related observations and economic forecasts. Though planning applications are discussed, they are not specific to a client situation. Any provision of services or making available of marketing materials, general financial educational materials, or general financial communications that a reasonable CFP® professional would not view as Financial Advice does not constitute Financial Advice. That is the case in this scenario. Because James is a CFP® professional, he must uphold the principles of the Code of Ethics and specific Standards of Conduct that apply at all times.
156
Jay, a CFP® professional and co-owner of a boutique RIA, had invested an overwhelming amount of his savings into a highly touted tech stock during an initial public offering (IPO) that proceeded to have record gains. As a result, he was viewed as an expert on stock transactions within his circle of peers. In the company of clients and his close friends, Jay exhibited confidence in his skill to predict stock performance and accurately identify the proper moment to buy or sell. Recently, at a friend’s birthday celebration, Jay had a long conversation with a childhood acquaintance. In the discussion, he outlined a specific method for stock purchase based on his acquaintance’s expressed goal. Also, Jay offered a recommendation to update his friend’s portfolio to a core-satellite strategy and passed along a referral to a colleague, Joanne, to implement an active portfolio management approach on a portion of the childhood acquaintance’s portfolio. All of these items were expressed with understanding of the childhood acquaintance’s desired goals and a general sense of his financial situation. Jay departed the party without exchanging information with his childhood acquaintance and did not follow up to find out if he proceeded with the ideas presented in their conversation.
What are the applicable guidelines?
- Code of Ethics
- Standards of Conduct (that apply at all times)
- Fiduciary Duty
- Managing Conflicts of Interest
157
Zoe, a CFP® professional, has a conversation at a cafe with Henry that covers specifics about several elements of his personal and financial situation. As they talk through each issue, Zoe provides handwritten recommendations on the back of a napkin corresponding to each planning area. Henry and Zoe agree to continue to meet at the cafe regularly to design a comprehensive planning strategy. Zoe sends Henry text messages periodically with suggested adjustments to the plan and additional action items.
What are the applicable guidelines?
- Code of Ethics
- Standards of Conduct (that apply at all times)
- Fiduciary Duty
- Managing Conflicts of Interest
- Practice Standards for the Financial Planning Process
158
CFP® certificants against whom allegations of Code and Standards violations and/or noncompliance are brought are subject to potential action from the CFP Board’s ?
Disciplinary and Ethics Commission (DEC)
159
CFP® professionals may only represent their compensation in one of the following ways:
– Fee only—only planning fees (no sales-related compensation)
– Fee based—planning fees + sales-related compensation
– Sales-related compensation. This is 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.
160
The Practice Standards are used by CFP Board’s ? and ? to evaluate a CFP® professional’s conduct to determine if the Code and Standards have been violated, based on the Procedural Rules established by CFP Board.
DEC and Appeals Committee
161
Which standard is a more lenient standard in that an investment can be suitable but not necessarily in the best interests of the client?
The suitability standard (registered representatives and agents suitability standard)
162
Members of the appeals committee may not be members of ?
the DEC.
