financial planning profession: practice, regulation

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Lecture 1Lecture 1

Financial Planning Profession:Financial Planning Profession:

PracticePractice

Regulation and EthicsRegulation and Ethics

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Personal Financial PlanningPersonal Financial Planning

The process of formulating, The process of formulating, implementing and monitoring implementing and monitoring multifunctional decisions that enable multifunctional decisions that enable a family to achieve financial goals a family to achieve financial goals and manage financial risk.and manage financial risk.

Both an ‘art’ and a ‘science’Both an ‘art’ and a ‘science’

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BenefitsBenefits

Efficient allocation of individual/family Efficient allocation of individual/family resourcesresources

Financial order & discipline Financial order & discipline More More likely to achieve goalslikely to achieve goals

Helps establish rationality and Helps establish rationality and feasibilityfeasibility

Better able to cope with and manage Better able to cope with and manage the fluctuations of the internal and the fluctuations of the internal and external environmentsexternal environments

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Goals and risksGoals and risks

Goals:Goals: Financial securityFinancial security Child’s collegeChild’s college RetirementRetirement Transfer of assets at deathTransfer of assets at death

Risks:Risks: DisabilityDisability Ill healthIll health Untimely deathUntimely death

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Financial Planner’s Pyramid Financial Planner’s Pyramid of Knowledgeof Knowledge

Planner’sProfessional

Responsibility

External Analysis

Establishing Financial Direction

Time Value of Money

Data Collection Financial

and Analysis

Insurance Investments Tax Retirement

Communication & Internal Analysis

Estates

Planning for Children’s Education

2002 Dalton Publications

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Financial Planning Financial Planning InstitutionsInstitutions

Accounting FirmsAccounting Firms Law FirmsLaw Firms Insurance CompaniesInsurance Companies PFP FirmsPFP Firms Investment BanksInvestment Banks BanksBanks Mutual FundsMutual Funds

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Financial Planning Financial Planning DesignationsDesignations

Certified Financial PlannerCertified Financial PlannerTMTM (CFP (CFPTMTM)) CFP Board of StandardsCFP Board of Standards

Chartered Financial Consultant Chartered Financial Consultant (ChFC)(ChFC) The American CollegeThe American College

Personal Financial Specialist (PFS)Personal Financial Specialist (PFS) AICPAAICPA

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Other Designations held by Other Designations held by Financial Services Financial Services

ProfessionalsProfessionals Chartered Life Underwriter (CLU)Chartered Life Underwriter (CLU)

The American CollegeThe American College

Chartered Financial Analyst (CFA)Chartered Financial Analyst (CFA) CFA InstituteCFA Institute

Certified Public Accountant (CPA)Certified Public Accountant (CPA) AICPAAICPA

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Other Licenses held by Other Licenses held by Financial Service Financial Service

ProfessionalsProfessionals Attorney (JD)Attorney (JD) Insurance AgentInsurance Agent Securities AnalystSecurities Analyst Registered Investment Adviser (RIA)Registered Investment Adviser (RIA) Real Estate BrokerReal Estate Broker

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Compensation MethodsCompensation Methods

Fee-only PlannersFee-only Planners Fee-based PlannersFee-based Planners Commission-based PlannersCommission-based Planners Fees for Assets under ManagementFees for Assets under Management

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Developing a Professional Developing a Professional PracticePractice

Building a practiceBuilding a practice Find a nicheFind a niche Relationship intensive; trustRelationship intensive; trust

Maintaining clientsMaintaining clients Listening to client needsListening to client needs

Education and continuing educationEducation and continuing education

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Ethics and RegulationEthics and Regulation

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The CFP Board and the The CFP Board and the Ethics CodeEthics Code

Certified Financial Planner Board of Certified Financial Planner Board of Professional ReviewProfessional Review (BOPR) (BOPR) Interprets and applies the Code of Ethics Interprets and applies the Code of Ethics

and Professional Responsibilityand Professional Responsibility Certified Financial Planner Board of Certified Financial Planner Board of

GovernorsGovernors – requires compliance with – requires compliance with the ‘Code’ by those certified to use the ‘Code’ by those certified to use the ‘CFP’ mark and those seeking the ‘CFP’ mark and those seeking certificationcertification

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The CFP Board and the The CFP Board and the Ethics CodeEthics Code

CFP Board Designee – anyone who is CFP Board Designee – anyone who is certified to use the ‘CFP’ trademark certified to use the ‘CFP’ trademark or is seeking certificationor is seeking certification

PrinciplesPrinciples – general guidelines which – general guidelines which apply to all designees (7)apply to all designees (7)

RulesRules – more specific & apply to – more specific & apply to specific professional instancesspecific professional instances

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Seven PrinciplesSeven Principles

IntegrityIntegrity ObjectivityObjectivity CompetenceCompetence FairnessFairness ConfidentialityConfidentiality ProfessionalismProfessionalism DiligenceDiligence

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Principle 1: IntegrityPrinciple 1: Integrity

Rule 101 of the Code prohibits the Rule 101 of the Code prohibits the solicitation of clients through solicitation of clients through “false “false or misleading communications or or misleading communications or advertisements.”advertisements.”

Creation of Unjustified expectationsCreation of Unjustified expectations Not representing CFP BoardNot representing CFP Board Dishonesty, fraud, deceit prohibitedDishonesty, fraud, deceit prohibited

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Principle 1: IntegrityPrinciple 1: Integrity

Commingling of fundsCommingling of funds May commingle client funds; not CFP’sMay commingle client funds; not CFP’s

Fiduciary relationshipFiduciary relationship Higher standard of care when dealing Higher standard of care when dealing

with client assets/propertywith client assets/property

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Principle 2: ObjectivityPrinciple 2: Objectivity

Intellectual honesty & impartialityIntellectual honesty & impartiality Exercise reasonable and prudent Exercise reasonable and prudent

professional judgmentprofessional judgment

ObjectivityObjectivity focuses on focuses on interest of clientinterest of client; ; integrityintegrity focuses on focuses on actions of CFPactions of CFP

Question: What is best for client?Question: What is best for client?

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Principle 2: ObjectivityPrinciple 2: Objectivity

Rule 201 states as follows: Rule 201 states as follows: ““A CFP Board designee shall exercise A CFP Board designee shall exercise

reasonable and prudent professional reasonable and prudent professional judgment in providing professional judgment in providing professional services.”services.”

What would a reasonable, prudent What would a reasonable, prudent CFP Designee do in similar CFP Designee do in similar circumstances?circumstances?

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Principle 3: CompetencePrinciple 3: Competence

Two areas of competence are Two areas of competence are knowledgeknowledge and and the the application of that knowledgeapplication of that knowledge..

““A CFP Board designee shall keep informed A CFP Board designee shall keep informed of developments in the field of financial of developments in the field of financial planning and participate in continuing planning and participate in continuing education throughout the designee’s education throughout the designee’s professional career in order to improve professional career in order to improve professional competence in all areas in which professional competence in all areas in which the designee is engaged.”the designee is engaged.”

Advise only in areas of competence; referralsAdvise only in areas of competence; referrals

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Principle 4: FairnessPrinciple 4: Fairness

The Code provides that a CFP Board The Code provides that a CFP Board designee designee “shall perform professional “shall perform professional services in a manner that is fair and services in a manner that is fair and reasonable to clients, principals, reasonable to clients, principals, partners, and employers and shall partners, and employers and shall disclose conflict(s) of interest(s) in disclose conflict(s) of interest(s) in providing such services.”providing such services.”

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Principle 4: Fairness, cont.Principle 4: Fairness, cont.

Fair – putting client interests firstFair – putting client interests first

Conflict of interest ex: planner receives Conflict of interest ex: planner receives commissions on products (AMEX)commissions on products (AMEX) Incentive to sell annuities; life insurance Incentive to sell annuities; life insurance

products w/ highest commissionsproducts w/ highest commissions

Disclosure of sources of compensationDisclosure of sources of compensation

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Principle 4: Fairness, cont.Principle 4: Fairness, cont.

Compensation shall be fair & Compensation shall be fair & reasonablereasonable

CFP employee shall perform in CFP employee shall perform in accordance with lawful objectives of accordance with lawful objectives of employer & in accordance w/ Codeemployer & in accordance w/ Code

Duty of good faith to partners in firm Duty of good faith to partners in firm – disclosure of relevant information– disclosure of relevant information Credentials, experience, licensing Credentials, experience, licensing

status,etcstatus,etc

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Principle 5: ConfidentialityPrinciple 5: Confidentiality

Rule 501 provides that a CFP Board Rule 501 provides that a CFP Board designee is prohibited from revealing designee is prohibited from revealing “or use for his or her own benefit—“or use for his or her own benefit—without the client’s consent, any without the client’s consent, any personally identifiable information personally identifiable information relating to the client relationship or relating to the client relationship or the affairs of the client, except and the affairs of the client, except and to the extent disclosure or use is to the extent disclosure or use is reasonably necessary.”reasonably necessary.”

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Principle 5: ConfidentialityPrinciple 5: Confidentiality

Necessary Necessary Establish brokerage acct, or other to Establish brokerage acct, or other to

carry out client engagementcarry out client engagement To comply with legal To comply with legal

requirements/processrequirements/process To defend CFP designee against To defend CFP designee against

wrongdoingwrongdoing Express or implied consentExpress or implied consent Disclosure limited to scope of exception.Disclosure limited to scope of exception. Harm to client not necessary.Harm to client not necessary.

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Principle 6: ProfessionalismPrinciple 6: Professionalism

““A CFP Board designee’s conduct in A CFP Board designee’s conduct in all matters shall reflect credit upon all matters shall reflect credit upon the profession.”the profession.”

CFP Board designees must CFP Board designees must “use the “use the marks in compliance with the rules marks in compliance with the rules and regulations of the CFP Board.”and regulations of the CFP Board.”

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Principle 7: DiligencePrinciple 7: Diligence

““A CFP Board designee shall act A CFP Board designee shall act diligently in providing professional diligently in providing professional services.”services.”

Under Rule 701, a CFP Board Under Rule 701, a CFP Board designee designee “shall provide services “shall provide services diligently.”diligently.”

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Principle 7: DiligencePrinciple 7: Diligence

Make only suitable recommendations Make only suitable recommendations for client (similar to competence)for client (similar to competence)

Make reasonable investigations Make reasonable investigations regarding financial products (may regarding financial products (may rely on other investigations)rely on other investigations)

Properly supervise subordinates & Properly supervise subordinates & not accept/allow violations of codenot accept/allow violations of code

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Disciplinary Rules and Disciplinary Rules and ProceduresProcedures

““The Procedures” are the rules and The Procedures” are the rules and regulations for disciplinary regulations for disciplinary proceedings against CFP Board proceedings against CFP Board designees.designees.

A standard of proof, or “burden of A standard of proof, or “burden of proof,” is the requirement of proving proof,” is the requirement of proving facts to a certain degree of facts to a certain degree of probability.probability.

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Burdens of ProofBurdens of Proof

Preponderance of the evidencePreponderance of the evidence 51% or better; more likely than not51% or better; more likely than not

Clear and convincing evidenceClear and convincing evidence 75%; required for reinstatement75%; required for reinstatement

Evidence beyond a reasonable doubtEvidence beyond a reasonable doubt 99%99%

Burden is upon the CFP BoardBurden is upon the CFP Board

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Grounds and Forms of Grounds and Forms of DisciplineDiscipline

Grounds for discipline--any act which Grounds for discipline--any act which violates the violates the CodeCode, , fails to comply with the Practice Standardsfails to comply with the Practice Standards , , violates any criminal laws, whether the CFP Board violates any criminal laws, whether the CFP Board designee is convicted or acquitted, is the proper designee is convicted or acquitted, is the proper basis for professional suspension, violates these basis for professional suspension, violates these Procedures or an order of disciplineProcedures or an order of discipline

Failure to respond to a request of the CFP Board without Failure to respond to a request of the CFP Board without good cause, or obstruction of the CFP Board or staff in good cause, or obstruction of the CFP Board or staff in the performance of their dutiesthe performance of their duties

Any false or misleading statement made to the CFP Any false or misleading statement made to the CFP BoardBoard

Other acts amounting to unprofessional conductOther acts amounting to unprofessional conduct

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Grounds and Forms of Grounds and Forms of DisciplineDiscipline (cont’d)(cont’d)

Forms of DisciplineForms of Discipline Private censure – unpublished, written Private censure – unpublished, written

reproachreproach Public letter of admonitionPublic letter of admonition Suspension – up to five yearsSuspension – up to five years Revocation – permanentRevocation – permanent

Board of Professional Review (BOPR) Board of Professional Review (BOPR) conducts investigationsconducts investigations

Hearing Panel hears evidenceHearing Panel hears evidence

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The Practice StandardsThe Practice Standards

Establishes level of professional Establishes level of professional practice that is expected – practice that is expected – agreed agreed upon norms of practiceupon norms of practice Facts of each situation determine Facts of each situation determine

services to be providedservices to be provided Financial Planning ProcessFinancial Planning Process

Six ‘Tasks’Six ‘Tasks’

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Step 1: Establish Client-Step 1: Establish Client-Planner RelationshipPlanner Relationship

Explore with the prospective client his/her Explore with the prospective client his/her financial planning needs and expectations, as financial planning needs and expectations, as well as the CFP professional’s suitability and well as the CFP professional’s suitability and desire to meet those needs and expectationsdesire to meet those needs and expectations

Discuss with the prospective client issues and Discuss with the prospective client issues and concepts related to the overall financial concepts related to the overall financial planning processplanning process

Explain to the prospective client the scope of Explain to the prospective client the scope of financial services offered by the CFP financial services offered by the CFP professional and his/her firmprofessional and his/her firm

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Step 1: Establish Client-Step 1: Establish Client-Planner RelationshipPlanner Relationship

Explain the sources and methods of Explain the sources and methods of compensation for the services providedcompensation for the services provided

Provide to the prospective client disclosures Provide to the prospective client disclosures as required by the CFP Board’s as required by the CFP Board’s Code of Ethics Code of Ethics and Professional Responsibilityand Professional Responsibility

Clarify the prospective client’s responsibilities Clarify the prospective client’s responsibilities and those of the CFP professionaland those of the CFP professional

Mutually define the scope of the engagementMutually define the scope of the engagement Document the scope of the engagementDocument the scope of the engagement

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Step 2: Gather Client Data Step 2: Gather Client Data and Determine Goals & and Determine Goals &

ExpectationsExpectations Obtain information necessary to formulate Obtain information necessary to formulate

the financial plan (e.g., through client the financial plan (e.g., through client interviews; questionnaires)interviews; questionnaires)

Collect applicable client records and Collect applicable client records and documentsdocuments

Determine the client’s personal and Determine the client’s personal and financial goals, needs, and priorities with financial goals, needs, and priorities with active client participationactive client participation

Determine the client’s time horizon for Determine the client’s time horizon for each identified goaleach identified goal

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Step 2: Gather Client Data Step 2: Gather Client Data and Determine Goals & and Determine Goals &

ExpectationsExpectations Identify the client’s values, attitudes, Identify the client’s values, attitudes,

and expectations that may impact and expectations that may impact the financial planthe financial plan

Determine the client’s level of Determine the client’s level of knowledge about financial mattersknowledge about financial matters

Determine the client’s risk tolerance Determine the client’s risk tolerance levellevel

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38 Step 3: Determine the Step 3: Determine the Client’s Financial Status Client’s Financial Status Through Analysis and Through Analysis and

EvaluationEvaluation Analyze and evaluate the client’s current Analyze and evaluate the client’s current

financial situation, preparing projections financial situation, preparing projections when appropriate:when appropriate: Statement of financial position/balance sheetStatement of financial position/balance sheet Cash flow statement/budgetCash flow statement/budget Debt (e.g., consumer, mortgage, investment, Debt (e.g., consumer, mortgage, investment,

contingent liabilities)contingent liabilities) Estate documents, strategies, and estate tax Estate documents, strategies, and estate tax

liabilitiesliabilities

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EvaluationEvaluation Analyze and evaluate the client’s current Analyze and evaluate the client’s current

financial situation, preparing projections financial situation, preparing projections when appropriate:when appropriate: Education fundingEducation funding Employee benefitsEmployee benefits Special circumstances (e.g., divorce, Special circumstances (e.g., divorce,

disabilities, non-traditional families)disabilities, non-traditional families) Income taxIncome tax InvestmentsInvestments Asset allocationAsset allocation

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EvaluationEvaluation Analyze and evaluate the client’s Analyze and evaluate the client’s

current financial situation, preparing current financial situation, preparing projections when appropriate:projections when appropriate: Insurance coverageInsurance coverage Closely held businessClosely held business Asset protectionAsset protection Capital needs analysisCapital needs analysis

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Step 4: Develop and Present Step 4: Develop and Present Financial Planning Financial Planning RecommendationsRecommendations

Prepare appropriate alternative Prepare appropriate alternative recommendations to meet the recommendations to meet the client’s goals and objectivesclient’s goals and objectives

Conduct quantitative sensitivity Conduct quantitative sensitivity analysis (e.g., changing assumptions analysis (e.g., changing assumptions such as inflation rate, rates of return, such as inflation rate, rates of return, time horizon)time horizon)

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Step 4: Financial Planning Step 4: Financial Planning RecommendationsRecommendations

Provide documentation for Provide documentation for recommendations where appropriate (e.g., recommendations where appropriate (e.g., prospectus, financial reports)prospectus, financial reports)

Present alternatives, recommendations, Present alternatives, recommendations, and review assumptions with the clientand review assumptions with the client

Obtain feedback from the client and revise Obtain feedback from the client and revise the recommendations, as appropriatethe recommendations, as appropriate

Prioritize action itemsPrioritize action items Obtain client’s agreementObtain client’s agreement

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Step 5: Implement the Step 5: Implement the Financial PlanFinancial Plan

Create an implementation plan with Create an implementation plan with an appropriate timelinean appropriate timeline

Implement the recommendationsImplement the recommendations Coordinate as necessary with the Coordinate as necessary with the

client and/or other professionalsclient and/or other professionals

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Step 6: Monitor the Financial Step 6: Monitor the Financial PlanPlan

Monitor and evaluate effectiveness of Monitor and evaluate effectiveness of recommendationsrecommendations

Review the performance and progress Review the performance and progress of the plan with the clientof the plan with the client

Discuss and evaluate changes in the Discuss and evaluate changes in the client’s personal circumstancesclient’s personal circumstances

Review and evaluate changes in the Review and evaluate changes in the legal, tax, and economic environmentslegal, tax, and economic environments

Make recommendations to Make recommendations to accommodate changed circumstancesaccommodate changed circumstances

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CFP DesignationCFP Designation

Educational RequirementsEducational Requirements Comprehensive Board ExamComprehensive Board Exam Work experience requirementWork experience requirement Agree to abide by Code of Ethics and Agree to abide by Code of Ethics and

Professional ResponsibilityProfessional Responsibility

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Elements of a Comprehensive Elements of a Comprehensive Financial PlanFinancial Plan

Personal DataPersonal Data Name, address, SS#, birth date, etc.Name, address, SS#, birth date, etc.

Goals and ObjectivesGoals and Objectives Basic foundation of planBasic foundation of plan Specific and preciseSpecific and precise

Identification of issues and problemsIdentification of issues and problems Major illness, education, taxes, etcMajor illness, education, taxes, etc

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AssumptionsAssumptions Inflation, growth, rates of return, mortalityInflation, growth, rates of return, mortality

Balance Sheet/Net worthBalance Sheet/Net worth Itemized as appropriateItemized as appropriate

Cash flow managementCash flow management Sources and uses of cashSources and uses of cash

Income taxIncome tax Projections as necessaryProjections as necessary

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Risk management/insuranceRisk management/insurance Mortality; morbidity; liability; property; Mortality; morbidity; liability; property;

businessbusiness Listing of existing policies and coveragesListing of existing policies and coverages

InvestmentsInvestments Risk tolerance; risk management; suitability; Risk tolerance; risk management; suitability;

liquidity; diversificationliquidity; diversification Financial independenceFinancial independence

Special treatment as necessarySpecial treatment as necessary

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Estate planningEstate planning ControlControl DispositionDisposition TaxationTaxation

RecommendationsRecommendations WrittenWritten

Implementation planImplementation plan Schedule reflecting responsibilities and timingSchedule reflecting responsibilities and timing

financial planning profession: practice, regulation

Documents