Frequently Asked Questions on the Ethics Requirement

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Frequently Asked Questions

NEW CODE OF ETHICS AND STANDARDS OF CONDUCT NOW EFFECTIVE

The new Code and Standards became effective Oct. 1, 2019, and includes a range of important changes, including expanding the scope of the fiduciary standard that requires CFP® professionals to act in the best interest of the client at all times when providing financial advice.  Learn More

1. How does CFP Board define Financial Planning?

In the new Code of Ethics and Standards of Conduct, CFP Board incorporates a shorter Financial Planning definition that is more user-friendly, without sacrificing clarity. The revised Financial Planning definition, which is set forth in both the Glossary and Standard B.1 of the new Standards of Conduct, consists of 30 carefully chosen words:

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.

To best understand this new definition, it is helpful to consider each element in succession:

  • “Financial Planning is a collaborative process”: CFP Board is committed to the fundamental principle that Financial Planning is a “process,” not a document or product. The Practice Standards provide the roadmap. (See Standard C.) Collaboration between the CFP® professional and the Client, and potentially others, is critical to the process.
  • “That helps maximize a Client’s potential”: The goal of Financial Planning is to help maximize the Client’s potential. In developing the definition, CFP Board carefully considered a long list of alternatives to “maximize,” including achieve, advance, enhance, foster, further, improve, increase, optimize, realize, and support. CFP Board determined that “maximize” is the word that best fits the definition because the goal of a CFP® professional providing Financial Planning is to make the most out of the Client’s potential. Maximize is qualified by “helps” and modifies the Client’s “potential,” but does not guarantee any specific financial performance.
  • “For meeting life goals”: The purpose of Financial Planning is to develop and meet goals. The goal is to obtain what the Client wants in life. Financial goals are one means to that end, not the end itself. Therefore, defining the goals as “financial goals” would be too narrow.
  • “Through Financial Advice”: Financial Advice is the financial planner’s tool. While a financial planner is focused on life goals, the advice that a financial planner provides is Financial Advice.
  • “That integrates relevant elements of the Client’s personal and financial circumstances”: “Integration” is essential to Financial Planning. The process requires integration of relevant elements of the Client’s personal and/or financial circumstances. A financial planner examines a Client’s circumstances and evaluates how one element of the Client’s life may affect other elements. Relevant elements of a 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.

2. The Code and Standards requires a CFP® professional to act as a fiduciary when providing Financial Advice to a Client. What is the difference between Financial Planning and Financial Advice?

Financial Advice has a much broader scope than Financial Planning. The new Code and Standards states that a CFP® professional provides Financial Planning “through” Financial Advice. While Financial Planning requires Financial Advice, not all Financial Advice requires Financial Planning. The new Code and Standards sets forth separate definitions for Financial Advice and Financial Planning. The Glossary 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:

  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

B. 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. The provision of services or the furnishing or making available of marketing materials, general financial education materials, or general financial communications that a reasonable person would not view as Financial Advice, does not constitute Financial Advice.

The new Code and Standards defines Financial Planning in the Glossary as follows:

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.

The new Code and Standards also identifies factors (See Standard B.4.) that CFP Board will weigh in determining whether a CFP® professional providing Financial Advice is required to provide Financial Planning, and thus is required to comply with the Practice Standards. These integration factors are discussed in another FAQ. Where application of those factors to a particular situation leads to the conclusion that Financial Planning is not required, the new Code and Standards does not require a CFP® professional to comply with the Practice Standards. (See Standard C.) In that circumstance, the CFP® professional remains obligated to act as a fiduciary when providing Financial Advice to a Client. (See Standard A.1.) As noted above, since Financial Planning requires Financial Advice, a CFP® professional also must act as a fiduciary at all times when providing Financial Planning to a Client.

3. When must a CFP® professional comply with the Practice Standards for the Financial Planning Process?

The new Code and Standards specifies – in Standard B.3 – three circumstances in which a CFP® professional must comply with the Practice Standards:

  1. When the CFP® professional agrees to provide or provides Financial Planning. This occurs when a CFP® professional and a Client explicitly agree that the CFP® professional will provide, or the CFP® professional actually provides, Financial Planning. An example of this is when a CFP® professional has provided to the Client, in writing, the terms of the Engagement for Financial Planning as required by Standard A.10.b.ii.
  2. When the CFP® professional agrees to provide or provides Financial Advice that requires integration of relevant elements of the Client’s personal and/or financial circumstances in order to act in the Client’s best interests. This occurs when a CFP® professional provides Financial Advice to a Client, but there is no explicit agreement or understanding between the CFP® professional and Client to provide Financial Planning. Rather, the nature of the Financial Advice requires the CFP® professional to provide Financial Planning to meet his or her fiduciary obligations. While this circumstance is similar to the historical concept of “material elements of financial planning” this standard examines the potential effect of the Financial Advice on the Client rather than the types of services the CFP® professional provides to the Client. Another FAQ discusses the factors that CFP Board will examine to determine whether integration is required.
  3. When the Client has a reasonable basis to believe the CFP® professional will provide or has provided Financial Planning. While the current Practice Standards examine the Client’s subjective understanding and intent in engaging the CFP® professional as one relevant factor in determining whether Financial Planning is required, the new Code and Standards provides an objective standard that, if satisfied, is sufficient to require Financial Planning. Whether the CFP® professional has held out to the Client that he or she provides Financial Planning is one of the relevant factors to be considered in assessing whether the Client’s belief is reasonable.

4. What factors will determine whether a CFP® professional is required to provide Financial Planning when providing Financial Advice to a Client, as required under Standard B.3.a.ii?

CFP Board will weigh the following five factors, which are set forth in Standard B.4.:

  1. The number of relevant elements of the Client’s personal and financial circumstances that the Financial Advice may affect. This factor requires a CFP® professional to review the Financial Advice the CFP® professional will provide to the Client and determine how many of the Client’s needs or wants the Financial Advice may affect. Financial Advice concerning one relevant element of the Client’s personal and financial circumstances may (or may not) be sufficient to require Financial Planning.
  2. The portion and amount of the Client’s Financial Assets that the Financial Advice may affect. This factor requires a CFP® professional to review the Financial Advice the CFP® professional will provide to the Client and determine the portion and amount of the Client’s Financial Assets the Financial Advice may affect. This factor focuses on both the portion and amount of Financial Assets. The effect on Financial Assets is just one factor that CFP Board would weigh in conjunction with others.
  3. The length of time the Client’s personal and financial circumstances may be affected by the Financial Advice. This factor requires the CFP® professional to assess the length of time the Financial Advice may affect the Client’s personal and financial circumstances.
  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. This factor requires the CFP® professional to assess how difficult it would be for the Client to unwind or modify the action taken to implement the Financial Advice.

Exam Dates

Upcoming:

CFP® Certification Examination
November 5-12, 2019

Most Recent Exam:

CFP® Certification Examination
July 9-16, 2019

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