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Disclosures Required when Providing Financial Advice and Financial Planning

CFP Board has developed a series of Frequently Asked Questions (FAQs) concerning CFP Board’s Code and Standards as a resource to CFP® professionals and their firms.

October 01, 2019

Questions

CFP Board’s Duty to Disclose and Manage Conflicts of Interest, which is set forth in Standard A.5 of the new Standards of Conduct requires a CFP® professional to fully disclose all Material Conflicts of Interest that could affect the professional relationship and provide sufficiently specific facts so that a reasonable Client would be able to understand the Material Conflicts of Interest and the business practices that give rise to the conflicts and give informed consent to such conflicts or reject them. As indicated in the Glossary, a “Conflict of Interest” arises when:

  1. 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
  2. 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 the disclosure about a Material Conflict of Interest provided to the Client was sufficient to infer that a Client has consented to a Material Conflict of Interest:

CFP Board will evaluate whether a reasonable Client receiving the disclosure would have understood the conflict and how it could affect the advice the Client will receive from the CFP® professional. The greater the potential harm the conflict presents to the Client, and the more significantly a business practice that gives rise to the conflict departs from commonly accepted practices among CFP® professionals, the less likely it is that CFP Board will infer informed consent absent clear evidence of informed consent. Ambiguity in the disclosure provided to the Client will be interpreted in favor of 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.”

CFP Board recognizes that, in some circumstances, there are logistical challenges to providing written disclosure of Material Conflicts of Interest. Therefore, the standard 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 may want to 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.

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 interests of the CFP® professional.

Disclosure of Material Conflicts of Interest does not eliminate the Duty of Loyalty or the Duty of Care.

When a CFP® professional provides Financial Advice, the CFP® professional must inform the client how the CFP® professional, the CFP® Professional’s Firm, and any Related Party are compensated for providing the products and services. A CFP® professional also must not make false or misleading representations regarding the method of compensation of the CFP® professional or the CFP® Professional’s Firm. Standard A.12 of the new Code and Standards addresses two specific compensation representations (fee-only and fee-based), defines important terms, provides a safe harbor for related parties, and sets forth a standard that applies to misrepresentations by a CFP® Professional’s Firm.

The standard with respect to when a CFP® professional may use the term fee-only remains largely the same. The standard defines the term fee-only by exclusion, and identifies individuals and entities whose compensation should be considered in determining whether fee-only is an appropriate compensation representation. A CFP® professional may describe his or her or the CFP® Professional’s Firm’s compensation method as fee-only only where: (a) the CFP® professional and the CFP® Professional’s Firm receive no Sales-Related Compensation; and (b) Related Parties receive no Sales-Related Compensation in connection with any Professional Services the CFP® professional or the CFP® Professional’s Firm provides to Clients. “Sales-Related Compensation” and “Related Parties” are defined terms that are discussed in other FAQs. CFP Board replaced the term “commissions” with Sales-Related Compensation because there are some fees that, like commissions, provide an incentive for the purchase or sale of Financial Assets (such as 12b-1 fees).

The new Code and Standards sets a new standard for the use of fee-based – a term that is equivalent to “fee and commission,” but is often confused with fee-only. The standard provides that a CFP® professional who represents his or her compensation method as fee-based must not use the term in a manner that suggests the CFP® professional or the CFP® Professional’s Firm is fee-only. Moreover, a CFP® professional using fee-based must clearly state either that the CFP® professional earns both fees and commissions or is not fee-only. This standard also applies to other similar terms that, like fee-based, may be confused with a fee-only compensation method.

CFP Board has defined the previously undefined term “Related Party” as including anyone whose receipt of Sales-Related Compensation reasonably would be viewed as directly or indirectly benefiting the CFP® professional or the CFP® Professional’s Firm. CFP Board will presume that family members and controlled business entities are Related Parties, but a CFP® professional may show otherwise. Sales-Related Compensation received by a Related Party only is relevant for purposes of fee-only if the compensation is received “in connection with any Professional Services the CFP® professional or CFP® Professional’s Firm provides to Clients.” This connection exists when the compensation results, directly or indirectly, from Client transactions referred (or facilitated) by the CFP® professional or the CFP® Professional’s Firm. For example, if a CFP® professional’s father is a broker who receives Sales-Related Compensation, but there is no connection between the father’s business and the CFP® professional’s business, the father’s Sales-Related Compensation is not being received “in connection with” the CFP® professional’s Professional Services. In this circumstance, the father’s Sales-Related Compensation would not prevent the CFP® professional from having a fee-only compensation method.

CFP Board also has a standard for using the term “fee-based.” A CFP® professional’s duty when using the term “fee-based” is discussed in another FAQ.

Sales-Related Compensation is more than a de minimis economic benefit, including any bonus or portion of compensation, resulting from a Client purchasing or selling Financial Assets. To account for compensation that is based on a Client’s decision to hold an asset, such as an incentive to advise a Client to annuitize a pension rather than take a lump sum, the Sales-Related Compensation definition also includes compensation resulting from a Client “holding” Financial Assets for purposes other than receiving Financial Advice. Sales-Related Compensation also includes compensation for the referral of a Client to any person or entity other than the CFP® Professional’s Firm, as the referral constitutes a Professional Service provided to a Client. The standard sets forth common examples of Sales-Related Compensation and explicitly excludes five types of compensation from the definition.

The new Code and Standards includes a Related Party compensation “safe harbor” for a CFP® professional who adopts and implements policies and procedures (including through a CFP® Professional’s Firm) reasonably designed to prevent recommendations that a Client purchase Financial Assets from or through, or refer any Clients to, a Related Party.

Standard 12.f provides a standard for when the CFP® Professional’s Firm makes compensation representations that are inconsistent with CFP Board’s Code and Standards. If the CFP® professional Controls the firm, the CFP® professional must not allow the firm to make a representation of compensation method that would be false or misleading if made by the CFP® professional. For example, when a CFP® professional is the sole owner of a firm that refers to its compensation method as fee-only, but the CFP® professional personally sells insurance and securities in exchange for Sales-Related Compensation, the Code and Standards would not permit the CFP® professional to allow the CFP® Professional’s Firm, which the CFP® professional Controls, to use fee-only because the CFP® professional earns Sales-Related Compensation.

If the CFP® professional does not Control the firm, the CFP® professional does not have an obligation to prevent the firm from making a false or misleading misrepresentation of compensation method. Instead, the CFP® professional must correct any misrepresentation of compensation method by accurately representing the CFP® professional’s compensation method to the CFP® professional’s Clients. For example, assume a CFP® professional is an employee at a corporation that refers to its compensation method as fee-only even though the CFP® professional and others in the corporation refer commission-earning insurance business to a Related Party. In this instance, the CFP® professional could not use the term fee-only. Therefore, the CFP® professional must inform Clients that his or her compensation method is fee and commission.

The new Code and Standards sets forth in Standard C, which contain the Practice Standards for the financial planning process, a principles-based documentation requirement that applies when a CFP® professional provides or is required to provide Financial Advice in accordance with the Practice Standards. A CFP® professional may memorialize information in a method of the CFP® professional’s choosing. The CFP® professional is not required to provide the information to the Client.

A CFP® professional must act prudently in documenting and retaining information, as the facts and circumstances require, taking into the account the significance of the information, the need to preserve the information in writing, the obligation to act in the Client’s best interests, and the CFP® Professional’s Firm’s policies and procedures. A CFP® professional may consider documenting the following information in writing, where relevant:

  1. The qualitative and quantitative information the CFP® professional obtains from the Client;
  2. The Client’s selected goals;
  3. The CFP® professional’s analysis of the Client’s current course of action;
  4. The CFP® professional’s analysis of potential alternative courses of action;
  5. The assumptions and estimates used in developing the recommendations;
  6. The recommendations the CFP® professional selects and the rationale for the recommendations;
  7. The basis for the selection of actions, products, and services;
  8. Actions the Client takes that deviate from the CFP® professional’s recommendations;
  9. When engaged for monitoring, the CFP® professional’s analysis of the Client’s progress towards achieving goals; and
  10. When engaged for monitoring and updating, which actions, products, and services are and are not subject to the CFP® professional’s monitoring responsibility, how and when the CFP® professional will monitor the actions, products, and services, how the CFP® professional will be informed of any material changes in the Client’s qualitative and quantitative information, and how and when a CFP® professional who is responsible for updating the Financial Planning recommendations will do so.

Documentation may be retained in, among other places, a client file, a Contact Management System file, a paper file, or a digital vault.

Read more FAQs

These FAQs are 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.

Browse the Compliance Resources Library