The Certified Financial Planner (“CFP”) Board of Standards, Inc. has issued updated Code of Ethics and Professional Responsibility and Rules of Conduct, which are scheduled to become effective July 1, 2008. With these updates, all CFP certificants will be held to a higher duty of care standard and will be required to place the interest of their clients ahead of their own at all times. Additionally, the updates make distinctions for CFP® certificants who provide financial planning services.
For example, the duty of care for CFP® certificants who provide financial planning services has been raised from the duty to “act in the interest of the client” to the “duty of care of a fiduciary.” See Code of Ethics and Professional Responsibility, Rules of Conduct, Rule 1.4. The CFP Board defines fiduciary as “One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.” Secondly, the updated standards require additional disclosures to both a client or prospective client, if the services to be provided include financial planning or material elements of the financial planning process. [See Rules 1.2 and 2.2.] Also, if services provided by a CFP® certificant include financial planning or material elements of the financial planning process, the certificant is required to have a written agreement with the client to govern the financial planning services. [See Rule 1.3.]
In the February 20, 2008, release, CFP Board’s Revised Standards of Professional Conduct: Frequently Asked Questions, the CFP Board’s Disciplinary and Ethics Commission (“Commission”) provided guidelines to help CFP® certificants determine when their activities are financial planning or material elements of the financial planning process. According to the Commission, some of the primary criteria for determining “material elements” are: 1) The client’s understanding and intent in engaging the certificant; 2) The degree to which multiple financial planning subject areas are involved; 3) The comprehensiveness of data gathering; and 4) The breadth and depth of recommendations. The CFP Board has stated that if a certificant is “unsure if a particular service or client relationship rises to the level of financial planning”, then the certificant should “embrace the CFP Board’s fiduciary standard and provide services in ways they believe are in the best interest of the client.” Supra, Question 8, p.6.
Rule 2.2 lists the written disclosures required to be made to clients or prospective clients when CFP® certificants are involved in engagements that involve financial planning or material elements of the financial planning process. These disclosures include:
1) An accurate and understandable description of the compensation arrangements being offered; 2) A general summary of likely conflicts of interest between the client and the certificant, the certificant’s employer or any affiliates or third parties; 3) Any information about the certificant or the certificant’s employer that could reasonably be expected to materially affect the client’s decision to engage the certificant or that the client might reasonably want to know in establishing the scope and nature of the relationship; and 4) Contact information for the certificant and if applicable, the certificant’s employer.
In addition to the written disclosures required by Rule 2.2, Rule 1.2 outlines additional disclosure obligations to clients and prospective clients when a certificant’s services include financial planning or material elements of the financial planning process. These additional disclosures include: 1) The obligations and responsibilities of each party, 2) Any compensation that may be related to the client agreement, 3) Any factors that determine costs, 4) The terms under which proprietary products may be offered, and 5) The terms under which other entities will be used to meet any services outlined in the agreement. Additionally, the certificant is instructed by Rule 1.2 to “encourage the prospective client or client to review the information and offer to answer any questions that the prospective client or client may have.” See CFP Board’s Revised Standards of Professional Conduct: Frequently Asked Questions, Question 12, p. 8.
The updated disclosure standards differ from the existing standards. For example, disclosures are now required to be made to prospective clients as well as existing clients. Disclosures must include material information that is relevant to the professional relationship, including compensation and conflicts of interest, as well as the CFP® certificant’s credentials and business affiliations. Disclosures must include direct or indirect compensation to both the CFP® certificant and/or the certificant’s employer. Also, in place of the standard for the certificant to advise clients that they can request updated information about compensation and conflicts of interest on an annual basis, the new standards impose a requirement that the certificant make timely disclosures to the client if previously disclosed information becomes outdated. Supra, Question 13, p.8. See also Rules 1.2 and 2.2.
It is a new requirement that for financial planning services, the certificant or certificant’s employer shall enter into a written agreement which identifies 1) The parties to the agreement, 2) The date of the agreement and its duration, 3) How and on what terms each party can terminate the agreement, and 4) The services to be provided as part of the agreement. See Rule 1.3. The CFP Board has explained that “the written agreement requirement was designed to help ensure that CFP® certificants and their clients define clearly the services involved in a specific business relationship and help reduce disputes based on misunderstandings of those services.” CFP Board’s Revised Standards of Professional Conduct: Frequently Asked Questions, Question 14, p. 8.
The CFP Board has explained that its enforcement of the ethical standards for CFP® professionals is intended to instill confidence in the public that they can trust a CFP® practitioner to help them realize their life goals through proper management of financial resources. See CFP Board Strengthens Its Ethics Enforcement Policy, Message from David G. Strege, CFP®, CFA®, Chair of CFP Board’s Board of Directors, p.3.
For further information regarding the new CFP standards, you may directly review the CFP Code of Ethics and Professional Responsibility, the CFP Rules of Conduct, the CFP Financial Planning Practice Standards, the CFP Disciplinary Rules and Procedures, and the CFP Board of Standards, Inc. release dated February 20, 2008, CFP Board’s Revised Standards of Professional Conduct: Frequently Asked Questions. If you are an investment advisor, RIA Compliance Consultants can assist you in complying with the new disclosure and agreement provisions of the CFP Board’s Revised Standards of Professional Conduct. Please contact us if you would like to discuss the services that we can provide.