fp chapter 3

HS 300 Financial Planning: Process and Environment

Chapter 3:

Ethics, Professionalism, andPractice Standards

Learning Objectives

Learning Objectives

1. Describe the role of ethics in society.

2. Explain the relationship between law and ethics.

3. Identify common themes and sentiments found in almost all ethics codes applicable to financial advisors.

Learning Objectives

4. Summarize the content of codes of ethics of Certified Financial Planner Board of Standards, Inc. and The American College.

5. Briefly explain what these codes mean in terms of daily professional practice.

6. Describe the qualities that define a professional.

Learning Objectives

7. Identify the hallmarks of professional behavior for financial advisors.

8. Explain why financial planning professionals are subject to increased risk of legal liability in business dealings with clients.

9. Explain the nature and significance of Certified Financial Planner Board’s practice standards for financial planning practitioners.

Learning Objectives

Discussion Break

If you had to choose between an advisor who would operate

(a) above the law, OR

(b) above the call (of duty),

which advisor would you choose?

Would you pay a premium to use either advisor?

Relationship Between Law and Ethics

Ethics Law



• How We Ought to Live:

Managers that define ethics as legal compliance are implicitly endorsing a code of moral mediocrity for their organizations.

Lynn Sharpe Paine

• You cannot legislate morality

– Not quite true

– That is the intersection of ethics and law


Role of Ethics

• Ethical Codes for Financial Advisors

– CFP® Board of Standards

– The American College

Overview of the CFP Board’sCode of Ethics and

Professional Responsibility

Certified Financial Planning Board

Overview• Code of Ethics and Professional

Responsibility (Code of Ethics)• Rules of Conduct• Financial Planning Practice Standards

(Practice Standards)• Disciplinary Rules and Procedures

(Disciplinary Rules)


Code of Ethics

CFP Board adopted the Code of Ethics to establish the highest principles and standards. These Principles are general statements expressing the ethical and professional ideals certificants and registrants are expected to display in their professional activities.


The Principles form the basis of CFP Board’s Rules of Conduct, Practice Standards and Disciplinary Rules, and these documents together reflect CFP Board’s recognition of certificants’ and registrants’ responsibilities to the public, clients, colleagues and employers.


Rules of ConductThe Rules of Conduct establish the high standards expected of certificants and describe the level of professionalism required of certificants. The Rules of Conduct are binding on all certificants, regardless of their title, position, type of employment or method of compensation, and they govern all those who have the right to use the CFP® marks, whether or not those marks are actually used.


The universe of activities engaged in by a certificant is diverse, and a certificant may perform all, some or none of the typical services provided by financial planning professionals.


Violations of the Rules of Conduct may subject a certificant or registrant to discipline.

Because CFP Board is a certifying and standards-setting body for those individuals who have met and continue to meet CFP Board’s initial and ongoing certification requirements, discipline extends to the rights of registrants and certificants to use the CFP® marks.


Practice Standards

The Practice Standards describe best practices of financial planning professionals providing professional services related to the six elements of the financial planning process.


Disciplinary Rules

The Disciplinary Rules provide a fair process pursuant to which certificants are given notice of potential violations and an opportunity to be heard by a panel of other professionals.

Code of Ethics Principles

Seven Principles

Principle 1: Integrity

Provide professional services with integrity.

Seven Principles

Principle 2: Objectivity

Provide professional services objectively.

Seven Principles

Principle 3: Competence

Maintain the knowledge and skill necessary to provide professional services competently.

Seven Principles

Principle 4: Fairness

Be fair and reasonable in all professional relationships. Disclose conflicts of interest.

Seven Principles

Principle 5: Confidentiality

Protect the confidentiality of all client information.

Seven Principles

Principle 6: Professionalism

Act in a manner that demonstrates exemplary professional conduct.

Seven Principles

Principle 7: Diligence

Provide professional services diligently.

Rules of Conduct(Distilled)

Rules of Conduct 1. Defining the Relationship With the

Prospective Client or Client

1.1 Services provided by certificant.1.2 Obligations of both parties when

financial planning takes place.1.3 Written agreement must include

these items when financial planning takes place.1.4 Fiduciary responsibility of certificant in planning relationships.

Rules of Conduct2. Information Disclosed to

Prospective Clients and Clients

2.1 Don’t lie, mislead, misstate or omit in client communications

2.2 Required disclosures

Rules of Conduct3. Prospective Client and Client

Information and Property

3.1 Confidentiality of client information3.2 Secure information and property3.3 Obtain all information relative to

decision making process3.4 I.D. client assets3.5 Maintain complete records

Rules of Conduct3. Prospective Client and Client

Information and Property

3.6 Don’t borrow from client (exceptions)3.7 Don’t lend to client (exceptions)3.8 No commingling of client assets with

certificant assets (exceptions)3.9 No commingling of client assets with

other client assets (exceptions)3.10 Return client assets when asked or as

agreed.

Rules of Conduct4. Obligations to Prospective Clients

and Clients

4.1 Fair treatment/professional service4.2 Advise in areas of competency4.3 Comply with applicable regulations4.4 Exercise reasonable and prudent

judgment4.5 Make or implement suitable recommendations

Rules of Conduct4. Obligations to Prospective Clients

and Clients

4.6 Provide reasonable and prudent professional supervision of

subordinates or third parties. 4.7 Obligation to inform clients of suspension or revocation action by CFP Board

Rules of Conduct5. Obligations to Employers

5.1 Perform professional services with dedication to lawful objectives of employer/principal.

5.2 Obligation to inform employer/ principal of suspension or

revocation action by CFP Board

Rules of Conduct6. Obligations to CFP Board

6.1 Abide by Board rules6.2 Meet Board requirements including

C.E.6.3 Keep contact information current6.4 Notify Board of convictions, professional suspensions or bar6.5 Not engage in conduct that reflects

adversely on integrity or fitness as a certificant

CFP Board’s FinancialPlanning Practice Standards

These Practice Standards are intended to:1. Assure that the practice of financial planning by CERTIFIED FINANCIAL PLANNER™ professionals is based on established norms of practice;

2. Advance professionalism in financial planning; and

3. Enhance the value of the financial planning process.

Practice Standards

A Practice Standard establishes the level of professional practice that is expected of certificants engaged in financial planning.

Description of Practice Standards

The Practice Standards apply to certificants in performing the tasks of financial planning regardless of the person’s title, job position, type of employment or method of compensation. Compliance with the Practice Standards is mandatory for certificants whose services include financial planning or material elements of the financial planning process.


The Practice Standards are designed to provide certificants with a framework for the professional practice of financial planning. Similar to the Rules of Conduct, the Practice Standards are not designed to be a basis for legal liability to any third party.


Each Practice Standard is a statement regarding an element of the financial planning process. It is followed by an explanation of the Standard, its relationship to the Code of Ethics and Rules of Conduct, and its expected impact on the public, the profession and the practitioner.

Format of the Practice Standards

The practice of financial planning consistent with these Practice Standards is required for certificants who are financial planning practitioners.

Compliance With the Practice Standards

100-1: Defining the Scope of the Engagement

The financial planning practitioner and the client shall mutually define the scope of the engagement before any financial planning service is provided.

Practice Standards

200-1: Determining a Client’s Personal and Financial Goals, Needs and Priorities

The financial planning practitioner and the client shall mutually define the client’s personal and financial goals, needs and priorities that are relevant to the scope of the engagement before any recommendation is made and/or implemented.

Gathering Client Data

200-2: Obtaining Quantitative Information and Documents

The financial planning practitioner shall obtain sufficient quantitative information and documents about a client relevant to the scope of the engagement before any recommendation is made and/or implemented.

Gathering Client Data

300-1: Analyzing and Evaluating the Client’s InformationA financial planning practitioner shall analyze the information to gain an understanding of the client’s financial situation and then evaluate to what extent the client’s goals, needs and priorities can be met by the client’s resources and current course of action.

Practice Standards

CFP Board’s FinancialPlanning Practice Standards

Part 2

The 400 Series

- These Practice Standards can be

described as

“What is Possible?”

“What is Recommended?”

“How is it Presented?”

Developing and Presenting the Financial Planning

Recommendation(s)

400-1: Identifying and Evaluating Financial Planning Alternative(s)

The financial planning practitioner shall consider sufficient and relevant alternatives to the client’s current course of action in an effort to reasonably meet the client’s goals, needs and priorities.


Recommendation(s)

400-2: Developing the Financial Planning Recommendation(s)

The financial planning practitioner shall develop the recommendation(s) based on the selected alternative(s) and the current course of action in an effort to reasonably meet the client’s goals, needs and priorities.


Recommendation(s)

400-3: Presenting the Financial Planning Recommendation(s)

The financial planning practitioner shall communicate the recommendation(s) in a manner and to an extent reasonably necessary to assist the client in making an informed decision.


Recommendation(s)

500-1: Agreeing on Implementation ResponsibilitiesThe financial planning practitioner and the client shall mutually agree on the implementation responsibilities consistent with the scope of the engagement.

Practice Standards

500-2: Selecting Products and Services for ImplementationThe financial planning practitioner shall select appropriate products and services that are consistent with the client’s goals, needs and priorities.

Practice Standards

600-1: Defining Monitoring ResponsibilitiesThe financial planning practitioner and client shall mutually define monitoring responsibilities.

Practice Standards

The American CollegeCode of Ethics

The American College Code of Ethics: Pledge

In all my professional relationships, I pledge myself to the following rule of ethical conduct: I shall, in light of all conditions surrounding those I serve, which I shall make every conscientious effort to ascertain and understand, render that service which, in the same circumstances, I would apply to myself.

I. Conduct yourself at all times with honor and dignity.

II. Avoid practices that would bring dishonor upon your profession or The American

College.

III. Publicize your achievement in ways that enhance the integrity of your profession.

The American College Code of Ethics: Eight Canons


IV. Continue your studies throughout your working life so as to maintain a high level of professional competence.

V. Do your utmost to attain a distinguished record of professional service.

VI. Support the established institutions and organizations concerned with the integrity of your profession.

VII. Participate in building your profession by encouraging and providing appropriate assistance to qualified persons pursuing professional studies.

VIII. Comply with all laws and regulations, particularly as they relate to professional and business activities.


SEC Reg. IA-2256

Role of Ethics

• Practical application of ethics code

• IA-2256 requires that RIAs adopt code of ethics

Ethics Mandate for Investment Advisors

• IA-2256 Investment Advisor Codes of Ethics

– Mandates registered advisers to adopt a code of ethics

– Subject to compliance and records

– Code breach is actionable

Discussion Break

As ethics and practice standards place increased demands on your business’s time and budget, how will you “manage” ethics in your practice?

Characteristics of a Professional

Characteristics Defining Professional

• Specialized knowledge

• Threshold entrance requirement

• Sense of altruism

• Code of ethics

• Does advisor listen to client?

• Does advisor answer client’s questions?

• Is advisor gathering information sufficient to provide good advice?

• Has advisor educated client about products and/or services?

Professional Behavior


• Has advisor considered client’s ability to deal with risk in recommendations?

• Has advisor disclosed educational background and affiliations in financial planning to the client?

• Does advisor provide client with a sense of steady service?

• Does advisor handle money matters properly?

• Does advisor refer to other experts?

• Does advisor seem up-to-date?


Characteristics of Professional

• Behaving professionally– Salesperson’s standard is suitability– Advisor’s standard is fiduciary

• Increased risk of legal liability– Lawsuits and complaints damage

reputation and practice• NASD’s broker check• CFP® Board reports disciplinary

actions

Applying CFP® Practice Standards to Financial

Planning Process

Financial Planning Process Steps and Corresponding Practice

Standard(s)

• Establishing and defining advisor-client relationship

100-1 Defining the scope of engagement

• Determining goals and gathering data

200-1 Determining goals, needs, priorities

200-2 Obtaining information and documents

• Analyzing and evaluating data

300-1 Analyzing and evaluating the client’s information


Standard(s)

• Developing and presenting a plan

400-1 I.D. alternatives

400-2 Develop recommendation

400-3 Present recommendation


Standard(s)

• Implementing the plan

500-1 Agreeing on implementing responsibilities

500-2 Selecting products and services for implementation


Standard(s)

• Monitoring the plan

600-1 Defining monitoring responsibilities


Standard(s)

Chapter Three Review


• Ethics and the law

• CFP Code Principles and Rules

– Confidentiality– Professionalism– Diligence

– Integrity– Objectivity– Competence– Fairness

• The American College Code– Pledge– Canons

• SEC Reg. IA-2256– Code breach is actionable

• What does it mean to be a professional?• What does it mean to not be a

professional?


• CFP Board® steps in financial planning process and corresponding practice standards


fp chapter 3

Documents

financial planning practitioners

financial planning practitioner

financial planning process

financial planning professionals

financial planning recommendation

financial planning service

american college code

financial planning