1.1 Financial Planning Process Flashcards
(33 cards)
What are the three components of fiduciary duty?
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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.
CFP and Trademark Symbol: What are the three certification marks you may use in your communication and collateral materials?
CFP® mark; CERTIFIED FINANCIAL PLANNER™ mark; CFP® mark logo
CFP and Trademark Symbol: What is the proper way to use CFP® in a sentence?
- 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.
CFP and Trademark Symbol: What are the reproduction guidelines for the CFP® certification marks?
CFP Board will generally grant you permission to use content or reprint additional copies of copyrighted materials, upon a written request.
Define financial planning
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.
What are some examples of a client’s personal and financial circumstances that may be relevant to financial planning?
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
What are common financial planning subject areas?
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
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?
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.
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?
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.
What are the lify-cycle planning stages?
- 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
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?
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.
What constitutes financial advice?
- 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;
- 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.
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.
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.
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:
- Makes a passing statement about a financial issue to someone just met at a party, or
- 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?
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.
What are the three requirements for a financial planning engagement to exist?
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
What are the integration factors to determine if the CFP practice standards apply?
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.
- 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.
- 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.
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.
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.
What are the mandatory elements of an engagement letter?
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
What are the 15 duties owed to clients and which apply to all situations vs financial advice vs financial planning?
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
What duties are owed to firm and subordinates?
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:
- 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.
What duties are owed to the CFP® Board?
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:
- A felony or Relevant Misdemeanor conviction
- A finding in a Regulatory Action or a Civil Action that the CFP® professional engaged in fraud, theft, misrepresentation, or other dishonest conduct.
- 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.
- A federal tax lien on property owned by the CFP® professional unless it can be rebutted.
- 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:
- Been charged with or convicted of a Felony or Relevant Misdemeanor
- Been named in a Regulatory Investigation for failure to comply with the laws, rules or regulations governing Professional Services
- Had conduct mentioned adversely in a Regulatory Action for failure to comply with the laws, rules or regulations governing Professional Services
- Had conduct mentioned adversely in a Civil Action for failure to comply with the laws, rules or regulations governing Professional Services
- 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,
- Had conduct mentioned adversely in a Civil Action for fraud, theft, misrepresentation or dishonest conduct
- Been the subject of a Finding of fraud, theft, misrepresentation or dishonest conduct in a Regulatory Action or Civil Action
- Become aware of an adverse arbitration award, civil judgment or a settlement in a Civil Action for fraud, theft, misrepresentation or dishonest conduct
- Had a professional license, certification, or membership suspended, revoked, or materially restricted because of a violation of rules or standards of conduct
- Been terminated from employment or resigned due to allegations of dishonesty, unethical conduct, or compliance failures.
- 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.
- Filed for or been the subject of a personal bankruptcy or business bankruptcy where the CFP® professional was a Control Person
- Received notice of a federal tax lien on property owned by the CFP® professional
- 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.
Quiz: CFP Board Question: Which of the following is considered adverse conduct? (Check all that are true.)
- 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: 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.
What is the CFP® Board Code of Ethics?
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.
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.
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.
