The 7 Step Financial Planning Process

CFP Board’s new Code of Ethics and Standards of Conduct (“Code and Standards”), which takes effect on October 1, 2019, incorporates a shorter Financial Planning definition and a comprehensive update to the Practice Standards that reflects the delivery of Financial Planning, provides detailed requirements for the Financial Planning process, and increases the number of steps in the Financial Planning process from six to seven.

The revised Financial Planning definition in the new Code and Standards, which is set forth in both the Glossary and Standard B1, consists of 30 carefully chosen words:

The delivery of Financial Planning and detailed requirements for the Financial Planning process are reflected in the Practice Standards. The revised Practice Standards in the new Code and Standards – which are set forth in Standard C – have been comprehensively updated. CFP Board has increased the number of steps in the Financial Planning process from six to seven.

The chart below compares the existing and revised Practice Standards:

Standard B3 of the new Code and Standards specifies three circumstances in which a CFP^® professional must comply with the Practice Standards:

• When the CFP^® professional agrees to provide or provides Financial Planning. This occurs when a CFP^® professional and a Client explicitly agree that the CFP^® professional will provide, or the CFP^® professional actually provides, Financial Planning. An example of this is when a CFP^® professional has provided to the Client, in writing, the terms of the Engagement for Financial Planning as required by Standard A10.
• When the CFP^® professional agrees to provide or provides Financial Advice that requires integration of relevant elements of the Client’s personal and/or financial circumstances in order to act in the Client’s best interests. This occurs when a CFP^® professional provides Financial Advice to a Client, but there is no explicit agreement or understanding between the CFP^® professional and Client to provide Financial Planning. Rather, the nature of the Financial Advice requires the CFP^® professional to provide Financial Planning to meet his or her fiduciary obligations. While this circumstance is similar to the historical concept of “material elements of financial planning” this standard examines the potential effect of the Financial Advice on the Client rather than the types of services the CFP^® professional provides to the Client.
• When the Client has a reasonable basis to believe the CFP^® professional will provide or has provided Financial Planning. While the current Practice Standards examine the Client’s subjective understanding and intent in engaging the CFP^® professional as one relevant factor in determining whether Financial Planning is required, the new Code and Standards provides an objective standard that, if satisfied, is sufficient to require Financial Planning. Whether the CFP^® professional has held out to the Client that he or she provides Financial Planning is one of the relevant factors to be considered in assessing whether the Client’s belief is reasonable.

A CFP^® professional who is providing Financial Planning must complete the first five steps of the Financial Planning process that are set forth in Standard C. It is not necessary, however, for a CFP^® professional to complete the last two steps of the Financial Planning process if those steps are specifically excluded from the Scope of Engagement. For example, some Clients may engage a CFP^® professional to complete the first five steps of the Financial Planning process and then work with another financial services provider to implement or monitor and update those recommendations. However, Standard A10 provides that a CFP^® professional is responsible for implementing, monitoring, and updating the Financial Planning Recommendation(s) unless specifically excluded from the Scope of Engagement.

CFP Board recognizes that a Client who does not want to engage a CFP^® professional for Financial Planning should be able to engage the CFP^® professional to provide more limited services and the Client should not be required to work with a non-CFP^® professional. Therefore, when a CFP^® professional otherwise would be required to comply with the Practice Standards, but the Client does not agree to engage the CFP^® professional for Financial Planning, the CFP^® professional has several options set forth in Standard B6. These include (a) not entering into the Engagement, (b) limiting the Scope of Engagement, (c) providing the requested services after informing the Client how Financial Planning would benefit the Client and how the decision not to engage the CFP^® professional to provide Financial Planning may limit the CFP^® professional’s Financial Advice, or (d) terminating the Engagement.