Avoiding or Managing and Disclosing Conflicts of Interest
The “Focus on Ethics” article series takes a close look at topics important to understanding CFP Board's new Code of Ethics and Standards of Conduct.
CFP Board’s new Code of Ethics and Standards of Conduct (“Code and Standards”), which takes effect on October 1, 2019, specifically addresses a CFP® professional’s obligations concerning Conflicts of Interest. The fourth element of the Code of Ethics states:
A CFP® professional must avoid or disclose and manage conflicts of interest.
This requirement is addressed more fully in Standard A5, which requires a CFP® professional who is providing Financial Advice to make full disclosure of all Material Conflicts of Interest that could affect the professional relationship with a Client and provide sufficiently specific facts so that the Client is able to understand the conflicts and the business practices that give rise to the conflicts and give informed consent to such conflicts or reject them.
A “Conflict of Interest” arises when:
- A CFP® professional’s interests (including the interests of the CFP® Professional’s Firm) are adverse to the CFP® professional’s duties to a Client; or
- A CFP® professional has duties to one Client that are adverse to another Client.
A Conflict of Interest becomes “Material” when a “reasonable Client or prospective Client would consider the information” about the conflict to be “important in making a decision” about the engagement with the CFP® professional, such as whether to retain, or continue to retain, a CFP® professional or whether to implement a recommendation.
In determining whether to infer that a Client has consented to a Material Conflict of Interest:
Informed Consent by the Client: Whether a Client has provided informed consent depends on the facts and circumstances and may be inferred when not explicit. For example, silence after disclosure may constitute informed consent if the disclosure contains sufficiently specific facts that are understandable to a reasonable Client, but may not constitute informed consent if that is not the case. CFP Board intends for its “informed consent” standard to be interpreted in a manner that is consistent with interpretations of the Investment Advisers Act of 1940. A CFP® professional may refer to regulatory guidance and case law interpretations to gain a deeper understanding of “informed consent.”
Form and Timing of Disclosure: CFP Board recognizes that, in some circumstances, there are logistical challenges to providing written disclosure of Material Conflicts of Interest. Therefore, Standard A5 does not require either the CFP® professional’s disclosure or the Client’s consent to be in writing. However, the standard also makes clear that evidence of oral disclosure of a conflict will be given such weight as CFP Board in its judgment deems appropriate.
In view of the fact-intensive nature of an inquiry into whether a CFP® professional orally disclosed a conflict, and whether a Client provided informed consent, a CFP® professional operating under a Material Conflict of Interest should consider, among other things, (a) avoiding business practices that create Material Conflicts of Interest that are difficult to manage, (b) describing all Material Conflicts of Interest to a Client clearly and in a manner that will allow the Client to understand the conflict, and (c) obtaining written consent to those Conflicts of Interest that a reasonable CFP® professional would consider adverse to the Client’s interests.
While not all Conflicts of Interest may be avoidable, under the new Code and Standards, a CFP® professional must act as a fiduciary at all times when providing Financial Advice to a Client, and the obligation to act in the Client’s best interest remains even when conflicts are present.
Access More Guidance Materials
This compliance resource is part of a full library of resources that CFP® professionals can use to comply with the Code and Standards. More guidance materials can be found in our Compliance Resources Library.