CFP-101 Unit 8: Professional Conduct and Fiduciary Responsibility

Advisory opinions

are issued periodically by CFP Board's Disciplinary and Ethics Commission to address topics of common interest that arise from an enforcement of either the Rules of Conduct or Practice Standards. These opinions are offered as guidance to CFP® professionals to advise them with respect to how the Disciplinary and Ethics Commission is likely to rule on a particular issue.

When and how certificant must notify CFP Board of crime?

certificant must notify CFP Board in writing of any conviction of a crime, except minor traffic offenses, of any professional discipline, or of a change to any matter previously disclosed to CFP Board within 30 calendar days after the date on which the certificant is notified of the conviction or professional discipline

By when must a certificant notify CFP Board of changes to contact information?

certificant must notify CFP Board of changes to contact information, including, but not limited to, email address, telephone number(s) and physical address, within 45 days.

certificant

is an individual who is currently certified by CFP Board.

Fiduciary relationships include:

■ agent/broker and principal; ■ trustee and beneficiary; ■ investment adviser and client; ■ attorney and client; ■ board of directors and company/shareholders.

Financial planning

"the process of determining whether and how an individual can meet life goals through the proper manage- ment of financial resources."

financial planning process

1. Establishing and defining the client-planner relationship 2. Gathering client data, including goals 3. Analyzing and evaluating the client's current financial status 4. Developing and presenting recommendations, alternatives, or both 5. Implementing the recommendations 6. Monitoring the recommendations

forms of dis- cipline for any CFP® professional who violates either the Rules of Conduct or fails to comply with the Practice Standards. They are listed in the order of severity:

1. Private censure by letter of reproach 2. Public letter of admonition 3. Suspension of the rights to use the CFP® marks for a specified period of time, not to exceed five years (the suspension will be published in a press release or other form of publicity) 4. Permanent revocation of the rights to use the CFP® marks

Which of the following uses of the CFP® certification marks is CORRECT? 1. Ed Lark's new website address is www.edlarkcfp.com. 2. I am friends with Katelyn Reed, a CFP® (Certified finanCial PlannerTM). 3. Emma Rae and Al Hill are Certified Financial PlannerTM certificants. 4. Sid Smith, a Certified finanCial PlannerTM professional, attended the meeting. A. 3 only B. 1 and 2 C. 3 and 4 D. 2, 3, and 4

A. CFP® certificants may not own or use an email address or internet domain name that includes the CFP® mark. The Certified Financial PlannerTM mark must not be used as a parenthetical expansion of the CFP® mark. The Certified Financial PlannerTM mark must always appear in all capital letters, or some type of "small cap" font (this is a font that displays all letters of the word capital- ized, but makes the first letters of each word slightly bigger).

The requirement to act in utmost good faith, in a manner reasonably believed to be in the best interest of the client, is known as A. fiduciary duty B. conditional responsibility C. trustee obligation D. the financial planning process

A. Rule 1.4 requires CFP® professionals to place the client's interest ahead of their own. When the professional provides financial planning or material elements of the financial planning process, the professional owes to the client the duty of care of a fiduciary. A fiduciary is defined by CFP Board as one who acts in utmost good faith, in a manner this person reasonably believes to be in the best interest of the client.

Stephanie, a CFP® professional, is in the process of analyzing and evaluating her client's financial status. As a financial planning practitioner, she has analyzed the information to gain an understanding of the client's current financial situation. What would be the most logical next step in her analysis? A. Determine to what extent the client's goals, needs, and priorities can be met by the client's resources and current course of action. B. The client should consult an attorney to draft any required legal documents. C. The practitioner needs to ask for testimonials and endorsements in order to grow her business. D. Determine what financial products would be appropriate in the implementation of the financial plan.

A. Under Practice Standard 300-1 (Analyzing and Evaluating the Client's Information), a financial planning practitioner should then evaluate to what extent the client's goals, needs, and pri- orities can be met by the client's resources and current course of action.

Natalie, a CFP® certificant, and Connor, her client, agreed last Saturday that Natalie will invest $4,000 in a mutual fund on Connor's behalf. Connor writes a check payable to Natalie. He tells her she may deposit the check in her business bank account and keep it there until the following Monday when she's back in her office. Natalie makes the deposit on Saturday with plans to submit the investment paperwork and the check to the mutual fund company on Monday. According to CFP Board's Rules of Conduct, which of the following statements concerning this arrangement is(are) CORRECT? 1. Natalie may commingle Connor's funds with those of her business if permitted by law. 2. Connor's check may be deposited into Natalie's business bank account because Connor told her she may do so. 3. Natalie may commingle Connor's funds with those of her business because the amount of the check is less than $5,000. 4. Natalie may deposit Connor's check in her business account because the funds will be in Natalie's business account less than 48 hours. A. 1 only B. 1 and 2 C. 2 and 4 D. 1, 2, and 3

A. Under Rule 3.8, a certificant must not commingle a client's property with the certificant's property unless the commingling is permitted by law or the certificant has explicit written authoriza- tion from the client. Here, Connor's permission was verbal, not written. CFP Board does not con- sider the amount of the funds or the time the funds remain in the certificant's account.

Nick, a CFP® professional, knows that he must provide a fiduciary duty of care when engaging in financial planning services for his clients. Therefore, Nick must do all of the following EXCEPT A exercise sound judgment when making financial planning recommendations for clients B make recommendations based on what will maximize Nick's compensation C only offer services for which he is competent D treat prospective clients fairly

B. A CFP® professional who acts within a standard of fiduciary care acts in utmost good faith in a manner believed to be in the best interest of clients. This care is to be extended to both clients and prospective clients and includes fair treatment, only offering services for which the CFP® profes- sional is competent, meeting regulatory requirements, and exercising sound judgment. Making rec- ommendations to maximize his own compensation is not acting in the best interest of the client.

Tony, a CFP® professional, has been an employee of Woodstone Financial Services for 20 years. Kerri has recently entered into a financial planning engagement with Tony. Which of the following statements regarding information about Woodstone is CORRECT? A. Tony must provide Kerri with Woodstone's contact information only. B. A written agreement should include information regarding any likely conflicts of interest between Kerri and Woodstone. C. Information about Woodstone must be provided to Kerri only upon request. D. CFP Board does not consider information regarding Woodstone material to the financial planning engagement as Tony is providing the financial planning services

B. CFP® professionals should follow CFP Board's disclosure requirements and apply them to their practices. This includes providing information in writing regarding any likely conflicts of inter- est between Kerri and Woodstone. Information regarding Woodstone is considered material by CFP Board. General information regarding Woodstone including, but not limited to, its contact informa- tion should be automatically provided to Kerri.

Paul is an experienced securities professional who has recently received his CFP® certification. He has made a recommendation to Amy, a very conservative investor, to purchase a highly volatile stock, which Paul believes is poised for extraordinary growth. Has Paul proceeded properly when recommending the stock as a possible purchase to Amy? Why or why not? A. Yes, Paul is an experienced securities professional who is competent in investing. B. No, Paul should have suggested that Amy purchase a stock more suitable for her low risk tolerance and conservative nature.

B. In addition to the fiduciary responsibility requirements of Rule 1.4, Rule 4.5 states that a certificant must make or implement only recommendations that are suitable for the client.

Brandon, a CFP® professional, is in the process of preparing a financial plan for Elizabeth, a 72-year- old widow. For Brandon to properly evaluate Elizabeth's financial status, Brandon is in need of information regarding Elizabeth's IRA. Elizabeth advises Brandon that she does not have this information. Which of the following are actions Brandon should take? 1. With the help of Elizabeth, try to obtain the information. 2. Nothing; just proceed with the evaluation without the information. 3. If the required information cannot be obtained, Brandon should advise Elizabeth of the inadequacy. 4. Discuss with Elizabeth the IRA values of Brandon's other clients in similar circumstances and come to an agreement regarding the value to use for evaluation purposes. A. 2 only B. 1 and 3 C. 3 and 4 D. 1, 3, and 4

B. Rule 3.3 requires CFP® professionals to strive to get the information and documenta- tion necessary to provide the best financial planning possible. If the required information can- not be obtained, the professional is responsible for advising clients of the inadequacy. Therefore, Statements 1 and 3 are correct, and Statement 2 is incorrect. Statement 4 is incorrect because Brandon may violate Rules 3.1 and 3.2 by breaching the confidentiality of his other clients if he shares their IRA values with Elizabeth.

Which of the following statements regarding CFP Board Code of Ethics is(are) CORRECT? 1. Diligence is the provision of services in a reasonably prompt and thorough manner. 2. Confidentiality means ensuring that information is accessible only to those authorized to have access. 3. Competence means attaining and maintaining an adequate level of knowledge and skill in all subject matter areas. 4. Certificants are placed in positions of trust by clients with no allowance for innocent error and legitimate differences of opinion. A. 2 only B. 1 and 2 C. 1, 2, and 3 D. 1, 2, 3, and 4

B. Statements 1 and 2 are correct. Statement 3 is incorrect. Certificants need not be com- petent in all subject matter areas, but when they lack competence they should recognize the limitations of their knowledge and consult with other professionals or refer their clients to other professionals. Statement 4 is incorrect. Under the Principle of Integrity, allowance can be made for innocent error and legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of one's principles.

Which of the following elements of the financial planning process are addressed in the Financial Planning Practice Standards? 1. Monitoring the recommendations 2. Gathering information necessary to fulfill the engagement 3. Analyzing and evaluating the certificant's financial status 4. Developing and presenting the financial planning recommendation(s) A. 2 and 3 B. 3 and 4 C. 1, 2, and 4 D. 1, 2, 3, and 4

C. Answer choice 3 is incorrect. Analyzing and evaluating the client's, not the certificant's, financial status is an element of the financial planning process addressed in the Practice Standards. Additionally, "establishing and defining the relationship with the client" and "implementing the financial planning recommendation(s)," are addressed by the Financial Planning Practice Standards.

Sidney, a CFP® professional, is considering various recommendations for his client, Anna, a wealthy 75-year old widow. During their meetings, Anna expressed an interest in establishing a testamen- tary trust for her children. Sidney has no trust expertise and feels as though the purchase of life insurance would be a better option for leaving an inheritance to Anna's children. Sidney also feels that Anna, like most 75-year olds, is too feeble to understand how trusts work anyway. Therefore, Sidney recommends a new life insurance policy for Anna with her children designated as beneficia- ries. Which of the following statements is(are) CORRECT? I. Sidney has violated the Principle of Competence because he did not consult a professional knowledgeable about trusts or refer Anna to someone with this expertise. II. Sidney has violated the Principle of Objectivity because of his consideration of Anna as "feeble." A. I only B. II only C. Both I and II D. Neither I nor II

C. Sidney has violated both of these principles. The decision to recommend life insur- ance without consulting a trust professional to consider Anna's wishes violated the Principle of Competence. Sidney also violated the Principle of Objectivity when he made the decision to recom- mend life insurance because he felt Anna was feeble.

CFP Board requires a written agreement by the CFP® professional or his employer if a certificant provides financial planning or material elements of the financial planning process to a client. Required elements of this written agreement include all of the following EXCEPT A. the date and duration of the agreement B. the parties to the agreement C. terms under which the certificant will use other entities to meet any of the agreement's obligations D. how and on what terms each party can end the agreement

C. The terms under which the CFP® professional will use other entities to meet any of the agreement's obligations may be communicated verbally or in writing. Another element that must be in writing addresses the services to be provided under the agreement.

Which of the following are required elements of the financial planning agreement? 1. Terms of proprietary products, if presented 2. Compensation received by the CFP® certificant 3. Any activity of other professionals consulted by the CFP® certificant 4. Duties of the CFP® certificant and the client during all steps of the financial planning process A. 2 and 4 B. 1, 2, and 3 C. 2, 3, and 4 D. 1, 2, 3, and 4

D. All of these elements are required. In Rule 1.2, CFP Board emphasizes the requirement that a certificant provide written information or discuss the duties of the certificant and the client during all steps of the financial planning process. Compensation that may be received by the certificant, any other party to the agreement, or any party legally associated with one of the parties must also be addressed. If proprietary products are to be presented, terms are to be disclosed. Also, if other professionals are to be consulted as part of the financial planning process, terms of these activities should also be made known. Although these matters can be discussed, CFP Board strongly recom- mends that these conversations be followed up in writing so clients can review the discussion points and have the opportunity to ask further questions.

Which of the following statements regarding the Financial Planning Practice Standards is(are) CORRECT? I. The Practice Standards are used by the Ethics and Professional Responsibility Committee to evaluate a CFP® professional's conduct. II. The rights to use the CFP® marks may be suspended for up to three years if a CFP® certificant fails to comply with the Practice Standards. A. I only B. II only C. Both I and II D. Neither I nor II

D. CFP Board's Disciplinary and Ethics Commission and Appeals Committee uses the Practice Standards to assess a CFP® professional's conduct. One of the disciplinary measures that may be imposed on a certificant if she fails to comply with the Practice Standards is the suspension of the rights to use the CFP® marks for a specified period of time, not to exceed five years.

Which one of the following statements regarding the Financial Planning Practice Standards is NOT correct? A. They are authoritative. B. They are statements regarding the elements of the financial planning process. C. They are used to evaluate a CFP® professional's conduct and determine if the Rules of Conduct have been violated. D. They set forth the level of professional practice that is expected of CFP® professionals and clients engaged in financial planning.

D. The Financial Planning Practice Standards ("Practice Standards") set forth the level of professional practice that is expected of CFP® professionals engaged in financial planning. Client behavior is not addressed.

Which of the following uses of the CFP® certification marks is CORRECT? 1. John Doe, CFPTM 2. John Doe, a CFP 3. John Doe, CERTIFIED FINANCIAL PLANNERTM 4. John Doe, CFP® A. 4 only B. 1 and 3 C. 2 and 4 D. 3 and 4

D. Whenever a CFP® certificant uses the initials after his name (e.g., on a business card), the initials should be followed by the symbol ® because the marks are protected by copyright law. If the words are used, they should be followed by a TM because the words are subject to trademark law. The CFP® marks should never be used as nouns.

When does a financial planning engagement exist?

exists whenever a CFP® professional performs any type of mutually agreed upon financial plan- ning service for a client.

The CFP® mark must be followed by one of the following six approved nouns, except when the mark immediately follows a certificant's name:

professional • practitioner • certificant • certification • mark • exam

Activities CFP Board may consider not to be material elements of the financial planning process include:

■completing paperwork to open a brokerage account; ■ acting as an order-taker for brokerage services; ■ engaging solely in sales activity related to insurance ■ acting as a mortgage broker without providing any other financial ■ completing tax returns without providing any other financial services; and ■ teaching a financial class or continuing education program.

subject matter of financial planning

■financial statement preparation and analysis; ■ education planning; ■ risk management; ■ investment planning; ■ income tax planning; ■ retirement planning; ■ estate planning.