Module 6.1

Fiduciary Duty (Standard A.1)

"At all times when providing Financial Advice to a client, a CFP(r) professional must act as a fiduciary, and, therefore, act in the best interests of the client"

Duty of Care

A CFP(r) professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client's goals, risk tolerance, objectives, and financial and personal circumstances. requires competency to give advice umbrella for the Prudent Investor Rule

Duty to Follow Client Instructions

A CFP(r) professional must comply with the terms of the client engagement and follow all directions of the client that are reasonable and lawful.

Duty of Loyalty

A CFP(r) professional must place the client's interests above the interests of the professional and its firm. This includes avoiding conflicts of interest or fully disclosing it to the client, then obtain informed consent from client, and manage the conflict.

3 checks (questions) to verify if Financial Advice requires Financial Planning

Answering yes to any of the following questions confirms that Financial Planning is occurring Has the planner agreed to provide or provided Financial Planning? Does the client have a reasonable basis to believe that the planner will provide or has provided Financial Planning? Does the Financial Advice provided require integration of relevant elements of the client's personal and financial circumstances in order to act in the client's best interests, taking into account the Integration factors?

Guidelines to follow AT ALL TIMES in the Client-Planner Relationship

Code of Ethics Standards of Conduct

Guidelines to follow WHEN PROVIDING FINANCIAL ADVICE in the Client-Planner Relationship

Code of Ethics Standards of Conduct Fiduciary Duty Managing Conflicts of Interest

Guidelines to follow WHEN FINANCIAL ADVICE REQUIRES FINANCIAL PLANNING & THE CLIENT ENGAGES in the Client-Planner Relationship

Code of Ethics - in addition, all duties owed to clients, firms, subordinates, and the CFP Board Standards of Conduct Fiduciary Duty (Standard 1.A) Managing conflicts of interest Practice Standards for the Financial Planning Process

CFP(r) professionals are subject to the following CFP Board's Standards:

Code of Ethics and Standards of Conduct (Code and Standards) Fitness Standards Procedural rules

Standard A.1

Defines Fiduciary Responsibility

Three Different Standards registered representatives are required to adhere

Department of Labor (DOL) fiduciary standard Registered Investment Adviser (RIA) fiduciary standard Registered representatives (RRs) and agents suitability standard - this is not a Fiduciary standard

Why is Fiduciary Duty important?

Driver of Code and Standards Fiduciary relationship exists whenever one person trusts in or relies upon another. Fiduciary relationship arises whenever confidence is reposed on one side, and domination and influence result on the other. in terms of investment advisors and clients, the US Supreme Court has described the advisor's duty as "an affirmative duty of utmost good faith, and full and fair disclosure of all material facts. This duty is owed to clients according to the Investment Advisors Act of 1940.

3 specific duties that fall under the Fiduciary Duty according to the CFP Board (found in the Codes and Standards)

Duty of Loyalty Duty of care Duty to follow client instructions

duties that fall under Fiduciary Duty that applies to professionals regardless of specialization within the financial services industry.

Duty of Loyalty* Duty of Care* Duty to Disclose - Disclosure is an important fiduciary duty, but disclosure in and of itself will not necessary meet the fiduciary standard. The client's interest will always come first. Duty to Diagnose - obligation to know your customer and to investigate the suitability of any product recommended. Goes hand in hand with suitability standards Duty to Consult - if an investment professional has any doubts concerning an issue that goes beyond their personal competence, an expert in that area should be consulted. Failure to consult specialists when needed may be the basis of a liability case brought against the investment professional and the firm. Duty to Keep Current - advisors are required to keep pace with changing environment. *duties that overlap with CFP Board's fiduciary duty and can be found in Standard A.1

How Fiduciaries can protect themselves from liability

One authority suggest that fiduciaries take the following steps to protect themselves from liability: keep detailed records of actions taken and the factors that went into the decisions make sure the records describe in detail the relevant circumstances prevailing at the time -by outlining the conditions under which the action was taken make sure all reasonable steps have been taken to acquire information needed to make informed decisions

RIA Fiduciary Standard

RIAs are also upheld to Fiduciary standard. Under Section 206 of the Advisors Act, RIAs must act in the best interest of clients. Disclosure of compensation and conflicts of interest must be made in writing, and a contract is required. RIAs must abide by the brochure rule, which requires providing every client and potential client with a copy of the firm's Form ADV Part 2. This also requires brochure to be in "plain English" enabling clients to better understand what is being disclosed. A fiduciary must also ensure that the client understands what is being disclosed.

Department of Labor (DOL) Fiduciary Standard

The highest standard, fiduciary standard, was administered by the US Dept of Labor (DOL) and applied to advice given to qualified retirement accounts such as DB plans or Defined Contribution plans. ERISA was enacted in 1974 over concern that private pension plans were being mismanaged. Overturned by US Fifth Circuit Court of Appeals so states started creating their own versions of the fiduciary standard based on DOL version. Anticipating a scenario in which the potential exists for 50 separate versions of the state-based fiduciary rules, the National Association of Insurance Commissioners (NAIC) has been developing model legislation that would protect consumers and expand the application of fiduciary standards to life insurance sales.

Prudent Investor Rule by the UPIA (Uniform Prudent Investor Act) which was adopted by the National Conference of Commissioners on Uniform State laws in 1994.

UPIA identifies 5 fundamental alterations in the former criteria of prudent investing: 1) Standard of prudence applied to any investment as part of the total portfolio 2) Trade-off in all investing between risk and return is the fiduciary's central consideration 3) No categorical restrictions on types of investments as long as appropriate in achieving the risk/return objectives of the trust 4) Prudent investing integrates the requirements that fiduciaries diversify their investments 5) Delegation of trust investment and management functions is permitted with appropriate safeguards This rule, which now requires a considerable degree of investment sophistication, puts the individual trustee at a disadvantage and enhance the role of the professional trustee. Individual trustee who are not themselves knowledgeable investors will probably need to secure advice of a professional investor or trustee to fulfill the fiduciary's investment duties.

Financial Planning as defined by the Code and Standards

a collaborative process that helps maximize a client's potential for meeting life goals through financial advice that integrates relevant elements for the client's personal and financial circumstances.

Items that are NOT considered FINANCIAL ADVICE

a communication that, based on its content, context, and presentation, would not reasonably be viewed as a recommendation responses to directed orders the following, if a reasonable CFP(r) professional would not view it as Financial Advice: -Marketing materials -General financial education -General financial communications

Financial Advice as defined by the Codes and Standards

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 - the development or implementation of a Financial Plan - the value of or the advisability of investing in, purchasing, holding, gifting, or selling Financial Assets - investment policies or strategies, portfolio composition, the management of Financial Assets, or other financial matters; or - the selection and retention of other persons to provide financial or Professional services to the client or the exercise of discretionary authority over the financial assets of a client

What if a client would not want to move forward with Financial Planning engagement after it's been determined that Financial advice provided requires Financial Planning?

a planner may do the following: - Provide the requested services after informing the client how Financial Planning would benefit the client and how the decision not to enter into the engagement may limit the Financial Advice - Not enter into engagement - Limit the scope of engagement to services that do not require financial planning - terminate the engagement

Rules-based approach to a fiduciary standard

a series of rules and guidelines - essentially a checklist of do's and don'ts.

Suitability Standard

the standard that registered representatives and insurance agents are held to More lenient standard in that an investment can be suitable but not necessarily in the best interest of the client. Standard itself allows the opportunity for advisors to offer a suitable product that may be more in the advisor's best interests rather than the client's. Verbal disclosure is often all that is needed under this standard. NOT A FIDUCIARY STANDARD

Relevant elements

incorporated into the financial planning process when Financial Planning takes place. These vary depending on the client and their circumstances. includes: -developing client goals -managing assets and liabilities -managing cash flow -identifying and managing risks -identifying and managing the financial effect of health considerations -providing for educational needs -achieving financial security -preserving or increasing wealth -identifying tax considerations -preparing for retirement -pursuing philanthropic interests -addressing estate and legacy matters

Principle-based approach to a fiduciary standard

more aspirational in nature current approach instituted by RIAs and CFP(r) professionals.

Attempting to nullify duties by use of written statements

mostly ineffective when an investment professional and its firm would attempt to escape liability by having a client sign a statement absolving from unethical or negligent conduct, this result does not always follow. When in doubt, the cautious investment professional should consult the firm's compliance or legal department.

Challenges to the rules-based approach

numbers of rules increase numerous rules increases complexity, creates possibilities of loopholes, and leads to enforcement issues

Is the determination of whether Financial advice has been provided is an objective or subjective inquiry?

objective inquiry. In other words, the more customized a planner's communications are to a client's individual situation, the greater the likelihood that Financial Advice is being provided.

Criteria for Financial Advice

the more individually tailored the communication is to the client, the more likely the communication will be viewed as Financial Advice Identify a situation in which you have provided financial services to a client that would be accurately considered Financial advice.

Integration factors

variables that weigh in determining whether Financial Advice requires Financial planning includes ff. 6 factors: -number of relevant elements -the portion and amount of the client's Financial assets that the Financial Advice may affect -Length of time the client's personal and financial circumstances may be affected by the Financial Advice -The effect of the client's overall exposure to risk if the client implements the Financial Advice -Barriers to modifying the actions taken to implement the Financial Advice This means that Financial Advice requires financial planning in situations where the depth and breadth of the factors is deemed significant