1. What types of activities does CFP Board consider "Material Elements of Financial Planning"?
CFP Board’s Disciplinary and Ethics Commission provides the following guidelines to help CFP® professionals determine when their activities are considered financial planning or material elements of financial planning.
The primary factors on which CFP Board relies for determining whether “material elements” exist are:
- The client’s understanding and intent in engaging the CFP® professional
- The degree to which multiple financial planning subject areas are involved
- The comprehensiveness of data gathering
- The breadth and depth of recommendations
Activities that CFP Board would likely consider to be material elements of financial planning include:
- Conducting detailed data-gathering regarding multiple aspects of a client’s financial situation
- Analyzing a client’s data and making recommendations across multiple financial planning subject areas
- Providing investment advisory services as defined by the applicable State or Federal regulators
Activities that CFP Board would not likely consider to be material elements of financial planning include:
- Opening an account or completing an application
- Fact-finding to meet regulatory requirements for suitability such as the “Know Your Customer” rules
- Solely providing brokerage and/or insurance products or services
- Engaging in activity solely related to the sale of a specific product
- Acting as a mortgage broker without providing any other financial services
- Completing tax returns without providing any other financial services
- Teaching a financial class or continuing education program
The above are examples and should not be considered an all-inclusive list.
These guidelines are designed to be helpful to CFP® professionals in reviewing their activities and determining whether they are providing material elements of financial planning. CFP Board’s Disciplinary and Ethics Commission also relies on these guidelines when reviewing allegations of misconduct by CFP® professionals.
2. What disclosures do the Standards require for client engagements that involve financial planning or material elements of financial planning?
CFP® professionals involved in client engagements that do involve financial planning or material elements of financial planning must make all of the disclosures listed in Rule 2.2, and they must also make those disclosures in writing. The written disclosures need not be a single newly-created document; the written disclosures may be made through multiple documents or through existing disclosure documents, such as Form ADV, that are used to make disclosures in compliance with state or federal laws, or the rules or requirements of any applicable self-regulatory organization.
Rule 1.2 outlines additional disclosure obligations to clients or prospective clients for engagements that include financial planning or material elements of financial planning, including the following general areas:
- The obligations and responsibilities of each party
- Any compensation that may be related to the client agreement
- The terms under which proprietary products may be offered
- Any factors that determine costs
- The terms under which other entities will be used to meet any services outlined in the agreement
Rule 1.2 also notes that if the information above is disclosed in writing, the CFP® professional must encourage the client or prospective client to review the information and offer to answer any questions that the client or prospective client may have.
3. Is any additional written documentation required by the Standards?
Yes. Rule 1.3 requires that financial planning services be accompanied by a written agreement that identifies:
- The parties to the agreement;
- The date of the agreement and its duration;
- The procedure and terms for terminating the agreement; and
- A description of the services to be provided as part of the agreement.
This written agreement requirement may be satisfied through multiple documents. The written agreement requirement was designed to help ensure that CFP® professionals and their clients define clearly the services involved in a specific business relationship and help reduce disputes based on misunderstandings of those services.
4. How can a CFP® professional be certain that a recommendation is the "best" for a client, given the enormous variety of financial strategies and products available?
CFP Board’s ethical standards emphasize the importance of professional judgment. The importance of a CFP® professional’s judgment is highlighted in the definition of “fiduciary” in the Standards: “One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.” CFP Board expects CFP® professionals to provide only financial planning recommendations (services and/or products) that they reasonably believe to be the best possible options available to their clients.
CFP Board acknowledges that it is impossible to review all possible options to select the best. There can be nearly infinite options when one brings together an individual’s situation and goals with the ever-increasing range of choices available to the financial services industry. For a CFP® professional who works in a setting where business or regulatory requirements limit the services or investments that can be made available to clients (captive agents, for example), CFP Board expects any financial planning services provided to be the best services and recommendations available, given the CFP® professional’s reasonable professional judgment and the limitations placed on the CFP® professional by those business or regulatory requirements. In such situations, the CFP® professional would be expected to disclose the limitations to the client, including any contractual or agency relationships that have potential to affect the client and any terms under which proprietary products may be offered.
For the CFP® professional who is engaged in financial planning or materials elements of financial planning, Practice Standards 400-2 explains that “the recommendations developed by the practitioner may differ from those of other practitioners or advisers, yet each may reasonably meet the client’s goals, needs and priorities.” Additionally, Practice Standards 500-2 explains that “products and services selected by the practitioner may differ from those of other practitioners or advisers [and] more than one product or service may exist that can reasonably meet the client’s goals, needs and priorities.”