1.1 Financial Planning Process

Question 1

What are the three components of fiduciary duty?

Answer 1

• Duty of Loyalty. A CFP^® professional must:
  
  • Place the interests of the Client above the interests of the CFP^® professional and his or her firm.
  • Avoid Conflicts of Interest or fully disclose Material Conflicts of Interest to the Client, obtain the Client’s informed consent, and properly manage the conflict, and
  • Act without regard to the financial or other interests of the CFP^® professional, the CFP^® Professional’s Firm, or any individual or entity other than the Client, which means that a CFP^® professional acting under a Conflict of Interest continues to have a duty to act in the best interests of the Client and place the Client’s interests above the CFP^® professional’s.
• Duty of Care. A CFP^® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the Client’s goals, risk tolerance, objectives, and financial and personal circumstances.
• Duty to Follow Client Instructions. A CFP^® professional must comply with all objectives, policies, restrictions, and other terms of the Engagement and all reasonable and lawful directions of the Client.

Question 2

CFP and Trademark Symbol: What are the three certification marks you may use in your communication and collateral materials?

Answer 2

CFP® mark; CERTIFIED FINANCIAL PLANNER™ mark; CFP® mark logo

Question 3

CFP and Trademark Symbol: What is the proper way to use CFP^® in a sentence?

Answer 3

• Always use capital letters.
• Never use periods.
• Always use the ® symbol.
• Always use with one of CFP Board’s approved nouns (“certificant,” “professional,” “practitioner,” “certification,” “mark” or “exam”) unless on the same line directly following the name of the individual certified by CFP Board.
• Always associate with the individual(s) certified by CFP Board.

Question 4

CFP and Trademark Symbol: What are the reproduction guidelines for the CFP^® certification marks?

Answer 4

CFP Board will generally grant you permission to use content or reprint additional copies of copyrighted materials, upon a written request.

Question 5

Define financial planning

Answer 5

Financial planning, as defined by CFP Board, “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.” It is the process of determining whether and how an individual can meet life goals through the proper management of financial resources.

CFP Board further clarifies this definition by making the following points:

• Financial planning is a process, not a document or product.
• The goal of Financial Planning is to help maximize the Client’s potential.
• The purpose of Financial Planning is to develop and meet goals.

Question 6

What are some examples of a client’s personal and financial circumstances that may be relevant to financial planning?

Answer 6

Relevant elements of the Client’s personal and financial circumstances vary from Client to Client, and may include the Client’s need for or desire to:

• Develop goals
• Manage assets and liabilities
• Manage cash flow
• Identify and manage risks
• Identify and manage the financial effect of health considerations
• Provide for educational needs
• Achieve financial security
• Preserve or increase wealth
• Identify tax considerations
• Prepare for retirement
• Pursue philanthropic interests, and
• Address estate and legacy matters

Question 7

What are common financial planning subject areas?

Answer 7

Financial planning subject areas are the basic subject fields covered in the financial planning process which typically include, but are not limited to:

• Financial statement preparation and analysis (including cash flow analysis/planning and budgeting)
• Education planning
• Insurance planning and risk management
• Employee benefits planning
• Investment planning
• Income tax planning
• Retirement planning, and
• Estate planning

Question 8

Quiz: Does CFP Board require CFP^® professionals to address a certain number of “relevant elements” of a Client’s personal and financial circumstances for the engagement to be considered Financial Planning?

Answer 8

No, CFP Board does not identify a minimum number of “relevant elements” for an engagement to be considered Financial Planning. While it is more likely that Financial Planning is required when several of the relevant elements of the Client’s personal and financial circumstances are involved, a Financial Planning Engagement may exist even when only one of the “relevant elements” is involved.

Question 9

Quiz: A client, Tom, informs a CFP^® professional that his daughter, Susie, graduated from college last month and landed her first job. Tom wants to establish a Roth IRA for Susie. Tom wants to make a $5,000 contribution for Susie and explains that she does not know about investing and probably would not have the money to contribute. How could the CFP® professional best accomplish Tom’s objective?

Answer 9

Request Tom set up a joint meeting with Susie to complete the planning process with her. Susie will be the client and account owner and will need to be involved in the process and also “known” by the CFP^® professional.

Question 10

What are the lify-cycle planning stages?

Answer 10

• Stage 1: The Early Years (18- 26)
• Stage 2: Family Formation Years
• Stage 3: Middle Age
• Stage 4: The Golden Years
• Stage 5: The Retirement Years

Question 11

Quiz: A married client told a financial planner that he secretly spent $50,000 on his mistress. This is a major conflict of interest because the planner is hired by the family. It is also a moral and ethical dilemma because if the planner told the wife, he is violating the husband’s confidentiality. If the planner withheld information from the wife, then he is violating her trust. What should the planner do?

Answer 11

Tell the husband to end the affair and give him time to do so. If the affair does not end, then the conflict of interest cannot be managed and the professional relationship with the couple must be terminated. A CFP^® professional must not reveal such sensitive non-public personal information about his client to the spouse without the client’s consent. This conflict of interest compromises the CFP^® professional’s ability to act in each client’s best interests. Therefore, the planning relationship should be terminated if the situation cannot be resolved.

Question 12

What constitutes financial advice?

Answer 12

• 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:

1. The development or implementation of a financial plan;
2. The value of or the advisability of investing in, purchasing, holding, gifting, or selling Financial Assets;
3. Investment policies or strategies, portfolio composition, the management of Financial Assets, or other financial matters;
4. 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.

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.

Question 13

Quiz: Carla, a CFP^® professional, reviews a new client’s IRA and recommends appropriate investments based on his risk tolerance profile. Which statement is correct?

Choose the best answer.

Carla provided Financial Advice when she suggested her client take, or refrain from taking, a particular course of action with respect to the value of investing in specific financial assets. Carla did not provide Financial Advice because she did not prepare a financial plan. When Carla provided Financial Advice to the client, she also engaged in financial planning. Carla provided Financial Advice in only one subject area, so she was not required to provide financial planning in accordance with the Practice Standards.

Answer 13

A is correct. B is incorrect because a CFP^® professional does not need to prepare a financial plan to provide Financial Advice. C is incorrect because providing Financial Advice, by itself, does not mean that a CFP^® professional has engaged in financial planning. D is incorrect because a CFP^® professional could provide Financial Advice in one subject area but still be deemed to be providing Financial Planning.

Question 14

Quiz: A CFP^® professional must act as a fiduciary when providing Financial Advice to a client. Will a CFP^® professional have a fiduciary duty when he or she:

1. Makes a passing statement about a financial issue to someone just met at a party, or
2. Provides general advice to a relative who asks for an opinion, for example, about a particular company or about the benefits of opening a 529 college savings plan for a newborn child?

Answer 14

No. The Glossary defines a “client” as any person to whom the CFP^® professional “provides or agrees to provide Professional Services pursuant to an Engagement.” An Engagement is an “oral or written agreement, arrangement or understanding.” Therefore, unless there is an agreement, arrangement or understanding that the CFP^® professional will be providing professional services, the person receiving the information is not a “client” and the CFP^® professional does not have a fiduciary duty to that person.

Question 15

What are the three requirements for a financial planning engagement to exist?

Answer 15

A Financial Planning engagement exists when:

• A CFP^® professional has agreed to provide or has provided Financial Planning
• The Client has a reasonable basis to believe that Financial Planning is or will be provided.
• The Financial Advice requires integration of relevant elements of the Client’s personal and/or financial circumstances in order to act in the Client’s best interests

Question 16

What are the integration factors to determine if the CFP practice standards apply?

Answer 16

CFP Board will weigh five Integration Factors to determine whether a CFP^® professional is required to provide Financial Planning and comply with the Practice Standards.

1. The number of relevant elements of the Client’s personal and financial circumstances that the Financial Advice may affect;
2. The portion and amount of the Client’s Financial Assets that the Financial Advice may affect;
3. The length of time the Client’s personal and financial circumstances may be affected by the Financial Advice;
4. The effect on the Client’s overall exposure to risk if the Client implements the Financial Advice. Relevant risks include investment risk, interest rate risk and inflation risk.
5. The barriers to modifying the actions taken to implement the Financial Advice. A CFP^® professional must assess how difficult it would be for the Client to unwind or modify the action taken to implement the Financial Advice.

Question 17

Quiz: Art Vandelay, CFP^® provides a client with Financial Advice. The client accepts the financial advice and purchases several stocks. Art then provides the information required under CFP Board’s Code and Standards to the client in an email confirming that he has made the requested purchases. Has Art satisfied his disclosure obligations under the Code and Standards?

Choose the best answer.

No. Art should have provided the required information prior to providing or implementing Financial Advice. Yes. Art was required to provide the information in writing and did so. Yes. Art provided the information within 90 days, as required by the Code and Standards. No. Art was not permitted to provide the information in an email.

Answer 17

A. Answer: The Code and Standards require a CFP^® professional, when providing Financial Advice, to provide certain information to the Client prior to or at the time of the Engagement. Providing the information after the implementation of Financial Advice is too late.

Question 18

What are the mandatory elements of an engagement letter?

Answer 18

Although the scope of the contract varies with an advisor’s business model, Standard of Conduct #10 requires that a CFP^® professional provide the following information to a Client in writing:

• The terms of the Engagement between the Client and the CFP^® professional or the CFP^® professional’s firm
• The Scope of Engagement and any limitations
• The period(s) during which the services will be provided, and
• The Client’s responsibilities

Question 19

What are the 15 duties owed to clients and which apply to all situations vs financial advice vs financial planning?

Answer 19

ADVICE+PLANNING Fiduciary Duty- 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. CFP^® professionals have a duty of loyalty to place the interests of the Client above the interests of the CFP^® professional and his or her firm. This includes avoiding conflicts of interest or fully disclosing any material conflicts of interest to the Client. Other duties include a duty of care and a duty to follow client instructions.

ALL Integrity- Professional services must be performed with integrity which demands honesty and candor. Improper conduct includes making untrue statements and attempts to defraud or deceive others.

ALL Competence- CFP^® professionals must provide competent services with relevant knowledge and skills. If competence is lacking, the CFP^® professional must either gain competence, obtain assistance from another professional, limit or terminate the engagement, or refer the Client to a competent professional.

ALL Diligence- Professional services must be performed in a timely and thorough manner.

ADVICE+PLANNING Disclose and Manage Conflicts of Interest- CFP^® professionals must make full disclosure of all Material Conflicts of Interest that could affect the professional relationship with the Client. A CFP^® professional must adopt and follow business practices that prevent Material Conflicts of Interest from compromising the practitioner’s ability to act in the Client’s best interest.

ALL Sound and Objective Professional Judgment- CFP^® professionals must exercise professional judgment and not solicit or accept any gift or non-cash compensation that would compromise objectivity.

ALL Professionalism- A CFP^® professional must treat others with dignity, courtesy and respect.

ALL Comply with the Law- This includes complying with laws, rules and regulations governing Professional Services.

ALL Confidentiality and Privacy- A CFP^® professional must not disclose any non-public information about current, former or prospective Clients but some exceptions are granted. Non-public Client information must be protected and policies must be in place to safeguard this information.

ADVICE+PLANNING Provide Information to a Client- This duty explains what information must be provided to a Client when providing Financial Advice and when providing Financial Planning.

ALL Duties When Communicating with a Client- Accurate and easily understood information must be provided to Clients.

ALL Duties When Representing Compensation Method- False or misleading representations regarding compensation methods must not be made to Clients. Information regarding fee-only, fee-based and sales-related compensation is explained.

ADVICE+PLANNING Duties When Recommending, Engaging, and Working with Additional Persons- A CFP^® professional must have a reasonable basis for the recommendation, must disclose any compensation arrangement that may apply, and must communicate with the other professional on behalf of the Client.

ALL Duties When Selecting, Using, and Recommending Technology- Reasonable care must be used when selecting and using technology products.

ALL Refrain From Borrowing or Lending Money and Commingling Financial Assets- A CFP^® professional may not borrow from or lend money to a Client unless certain exceptions apply.

PLANNING: Practice Standards for financial planning + information in writing

Question 20

What duties are owed to firm and subordinates?

Answer 20

Use Reasonable Care When Supervising- A CFP^® professional must exercise reasonable care when supervising persons acting under the CFP^® professional’s direction, including employees and other persons over whom the CFP^® professional has responsibility, with a view toward preventing violations of applicable laws, rules, regulations, and these Standards.

Comply with Lawful Objectives of CFP^® Professional’s Firm- A CFP^® professional:

1. b. Will be subject to discipline by CFP Board for violating policies and procedures of the CFP^® Professional’s Firm that do not conflict with these Standards.
   c. Will not be subject to discipline by CFP Board for violating policies and procedures of the CFP^® Professional’s Firm that conflict with these Standards.

Provide Notice of Public Discipline - A CFP^® professional must promptly advise the CFP^® Professional’s Firm, in writing, of any public discipline imposed by CFP Board.

Question 21

What duties are owed to the CFP® Board?

Answer 21

Duty 2. Refrain from Adverse Conduct- A CFP^® professional may not engage in conduct that reflects adversely on his or her integrity or fitness as a CFP^® professional, upon the CFP^® marks or upon the profession. Such conduct includes but is not limited to, conduct that results in:

1. A felony or Relevant Misdemeanor conviction
2. A finding in a Regulatory Action or a Civil Action that the CFP^® professional engaged in fraud, theft, misrepresentation, or other dishonest conduct.
3. A personal or business bankruptcy filing or adjudication where the CFP^® professional was a Control Person of the business, unless the CFP^® professional can rebut the presumption that the bankruptcy demonstrates an inability to manage responsibly the CFP^® professional’s or the business’s financial affairs.
4. A federal tax lien on property owned by the CFP^® professional unless it can be rebutted.
5. A non-federal tax lien, judgment lien, or civil judgment that has not been satisfied within a reasonable amount of time unless it can be rebutted.

Duty 3: Reporting- A CFP^® professional must provide written notice to CFP Board within 30 calendar days after the CFP^® professional has:

1. Been charged with or convicted of a Felony or Relevant Misdemeanor
2. Been named in a Regulatory Investigation for failure to comply with the laws, rules or regulations governing Professional Services
3. Had conduct mentioned adversely in a Regulatory Action for failure to comply with the laws, rules or regulations governing Professional Services
4. Had conduct mentioned adversely in a Civil Action for failure to comply with the laws, rules or regulations governing Professional Services
5. Had an adverse arbitration award, civil judgment or a $15,000 or more settlement in a Civil Action for failure to comply with the laws, rules or regulations governing Professional Services,
6. Had conduct mentioned adversely in a Civil Action for fraud, theft, misrepresentation or dishonest conduct
7. Been the subject of a Finding of fraud, theft, misrepresentation or dishonest conduct in a Regulatory Action or Civil Action
8. Become aware of an adverse arbitration award, civil judgment or a settlement in a Civil Action for fraud, theft, misrepresentation or dishonest conduct
9. Had a professional license, certification, or membership suspended, revoked, or materially restricted because of a violation of rules or standards of conduct
10. Been terminated from employment or resigned due to allegations of dishonesty, unethical conduct, or compliance failures.
11. Had a customer-initiated complaint for forgery, theft, misappropriation or conversion of financial assets; sales practice violations which contained a claim for compensation of $5,000 or more; or sales practice violations settled for $15,000 or more.
12. Filed for or been the subject of a personal bankruptcy or business bankruptcy where the CFP^® professional was a Control Person
13. Received notice of a federal tax lien on property owned by the CFP^® professional
14. Failed to satisfy a non-federal tax lien, judgment lien, or civil judgment within one year of its date of entry, unless payment arrangements have been agreed upon by all parties.

Duty 4. Provide Narrative Statement- The written notice must include a narrative statement that accurately and completely describes the Material facts and the outcome or status of the reportable matter.

Duty 5: Cooperation- A CFP^® professional may not make false or misleading representations to CFP Board or obstruct CFP Board in the performance of its duties. A CFP^® professional must satisfy the cooperation requirements set forth in CFP Board’s Procedural Rules, including by cooperating fully with CFP Board’s requests, investigations, disciplinary proceedings, and disciplinary decisions.

Duty 6. Compliance with Terms and Conditions of Certification and License- A CFP^® professional must comply with these terms.

Section F. Prohibition on Circumvention- A CFP^® professional may not do indirectly, or through or by another person or entity, any act or thing that the Code and Standards prohibit the CFP^® professional from doing directly.

Question 22

Quiz: CFP Board Question: Which of the following is considered adverse conduct? (Check all that are true.)

1. A second misdemeanor conviction for DWI (driving while intoxicated) 2. A bankruptcy filing by a mid-sized firm where the CFP^® professional works as a non-managerial financial advisor 3. An IRS tax lien assessed on a CFP^® professional’s personal investment account 4. A city property tax lien for $500 that the CFP^® professional satisfied within 30 days of being issued 5. A civil court finding that a CFP^® professional embezzled $700 from a social club where he served as treasurer.

Answer 22

Answer: 1, 3 and 5. The non-federal tax lien is not identified as adverse conduct because it was satisfied within a reasonable amount of time. The business bankruptcy is not identified as adverse conduct because the CFP^® professional is not a Control Person of the business.

Question 23

What is the CFP® Board Code of Ethics?

Answer 23

Code of Ethics: A CFP^® professional must:

• 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.

Question 24

Quiz: A client is involved in a potentially litigious matter and asks to confide legally sensitive information to a CFP^® professional under the protection of advisor-client privilege. This information may affect another one of the CFP^® professional’s clients, who happens to be a business partner of the first client. How should the CFP^® professional respond to this situation?

Choose the best answer.

Document the information as required by CFP Board’s Rule on Reciprocal Disclosure. Document the information and, as required by CFP Board’s fiduciary standard, debrief the second client on the details that pertain to her. Caution the client that there is no such thing as advisor-client privilege. Ensure that the client signs the required Privacy Policy before having any discussions.

Answer 24

C. Under a Duty Owed to Clients #9: Confidentiality and Privacy, a CFP^® professional shall treat information as confidential except as required in response to proper legal process; as necessitated by obligations to an employer or partners; as required to defend against charges of wrongdoing; in connection with a civil dispute; or as needed to perform the services.

Question 25

Quiz: Which of the following statements regarding Financial Advice and Financial Planning are correct? (Click all that apply.)

Financial Planning is provided “through Financial Advice” therefore, Financial Planning requires Financial Advice. Not all Financial Advice requires Financial Planning. A CFP^® professional must at all times act as a fiduciary when providing Financial Advice and Financial Planning to a client. The more individually tailored the communication is to the client, the more likely the communication will be viewed as Financial Advice.

Answer 25

All of the above

Question 26

Quiz: The following statements regarding the Code of Ethics and Standards of Conduct are correct, EXCEPT:

Choose the best answer.

Compliance with the Code and Standards is a requirement of certification. The Code and Standards benefits and protects the public, provides standards for delivering financial planning, and advances financial planning as a distinct and valuable profession. The Code and Standards is a basis for civil liability. Violations of the Code and Standards may subject a CFP^® professional to discipline from CFP Board.

Answer 26

C. The Code and Standards is not designed to be a basis for civil liability.

Question 27

Quiz: If the Financial Advice you provide to a Client requires Financial Planning, and the Client agrees to engage in Financial Planning, then the Practice Standards apply.

Answer 27

True

Question 28

Quiz: Which activity does not need to be addressed when defining the scope of the engagement with a Client?

Choose the best answer.

Identifying the financial planning service(s) to be provided and any limitations Determining the period(s) during which the services will be provided Disclosing how asset allocation is performed Determining client responsibilities

Answer 28

C. Financial planners do not need to disclose their methods of analysis that may result in financial planning recommendations in order to define the scope of the engagement.

Question 29

Quiz: Which of the following statements regarding the scope of the engagement is not correct?

Choose the best answer.

The scope of the engagement does not need to be in writing. The scope of the engagement may include one or more financial planning subject areas. It is acceptable to mutually define financial planning engagements in which the scope is limited to specific activities. As the relationship proceeds, the scope of the engagement may change by mutual agreement.

Answer 29

A. The scope of the engagement is typically provided at the first or second meeting with the Client and it is presented in writing in one or more documents.

Question 30

Quiz: Which statement is not one of the three indicators that explain when a financial planning engagement exists?

Choose the best answer.

When a CFP^® professional has completed all seven steps in the financial planning process. When a CFP^® professional has agreed to provide or has provided Financial Planning When the Client has a reasonable basis to believe that Financial Planning is or will be provided. When the Financial Advice requires integration of relevant elements of the Client’s personal and/or financial circumstances in order to act in the Client’s best interests

Answer 30

It is not necessary for each of the seven steps to be followed in order for a Financial Planning engagement to exist. A CFP^® professional who is providing Financial Planning must complete the first five steps of the Financial Planning Process as outlined in the Practice Standards. A CFP^® professional is also responsible for implementing, monitoring, and updating the Financial Planning recommendations as directed in Practice Standards 6 and 7 unless specifically excluded from the Scope of the Engagement.

Question 31

Quiz: Identify the Integration Factors that determine whether a CFP^® professional is required to provide Financial Planning and comply with the Practice Standards. (Click all that apply.)

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. Relevant risks include investment risk, interest rate risk and inflation risk.

Answer 31

All of the above. The fifth factor includes the barriers to modifying the actions taken to implement the Financial Advice. A CFP^® professional must assess how difficult it would be for the Client to unwind or modify the action taken to implement the Financial Advice.

Question 32

Quiz: Which of the following CFP® professionals are providing Financial Advice? (Click all that apply.)

1. Christine, who does not charge Marty for a financial plan she developed for him since she hopes to earn a commission when Marty implements the plan through her. 2. Paul, who gave his neighbor a marketing brochure about his financial planning firm. 3. Vickie, who provides comprehensive pro bono financial planning to a veteran. 4. Carlos, who provides a prospective client with a book he wrote on saving for retirement. 5. Gwen, who retained a CPA to provide her client with tax planning advice. 6. Brian, who explained changes in the stock market to his golf buddies. 7. Colleen, who reviews a new client’s IRA and recommends mutual fund investments based on his risk tolerance profile. 8. John, who recommends a boat mechanic to his client. 9. Maureen, who meets her neighbor at a BBQ where they discuss the value of having a life insurance policy.

Answer 32

1, 3, 5, 7

Question 33

Quiz: An elderly client has been forgetful lately and the planner has been concerned that he may be in the early stages of dementia. There are some important investment decisions that need to be made that require the client’s approval. What should the planner do?

Choose the best answer.

Call the client’s son and invite him to the meeting with the client to discuss making changes to the client’s investment portfolio. Put the investment information in writing and send it to the son to obtain his advice. Accompany the client to an appointment with an estate planning attorney to obtain proper legal documents to plan for his possible incapacity.

Answer 33

C. Under a Duty Owed to Clients #9: Confidentiality and Privacy, a CFP^® professional may not disclose any non-public information about a client except for ordinary business purposes or for legal and enforcement purposes.