Developing, Presenting, and Implementing Recommendations

CFP Board’s new Code of Ethics and Standards of Conduct (“Code and Standards”), effective October 1, 2019, introduces a new 7-step financial planning process that requires a CFP^® professional providing financial planning to “Develop the Financial Planning Recommendation(s)” (Step 4), “Present the Financial Planning Recommendation(s)” (Step 5) and “Implement the Financial Planning Recommendation(s)” (Step 6).

The Practice Standards outline a process where recommendations for a Client come after the CFP^® professional gains an understanding of the Client’s personal and financial circumstances (Step 1), helps the Client with identifying and selecting goals (Step 2), and analyzes the Client’s current course of action and potential alternative course(s) of action (Step 3).

Step 4: Developing the Financial Planning Recommendation(s)

A CFP^® professional then develops the financial planning recommendation(s) by selecting, from among the potential alternative courses of action, one or more recommendation(s) designed to maximize the potential for meeting the Client’s goals. For each recommendation selected, the CFP^® professional must consider the following information:

• The assumptions and estimates used to develop the recommendation;
• The basis for making the recommendation, including how the recommendation is designed to maximize the potential to meet the Client’s goals, the anticipated material effects of the recommendation on the Client’s financial and personal circumstances, and how the recommendation integrates relevant elements of the Client’s personal and financial circumstances;
• The timing and priority of the recommendation; and
• Whether the recommendation is independent or must be implemented with another recommendation.

Step 5: Presenting the Financial Planning Recommendation(s)

The next step requires the CFP^® professional to present the recommendation(s) to the Client and discuss with the Client the information that was required to be considered when developing the recommendation(s). The Practice Standards do not require the CFP^® professional to put all Financial Planning recommendation(s) in writing, nor must the financial planning recommendation(s) have the same elements. CFP^® professionals must exercise professional judgment in determining how best to present Financial Planning recommendations to Clients.

Developing and presenting the recommendation(s) are distinct steps that occur at different times and sometimes by different individuals. Indeed, the person who develops the recommendation may not be the same person who presents the recommendation to the Client. As technology’s role in developing Financial Planning recommendations increases, the distinction of these steps will be more pronounced.

Step 6: Implementing the Financial Planning Recommendation(s)

The sixth step sets forth the requirements when implementing the Financial Planning recommendation(s). A CFP^® professional is responsible for implementing the Financial Planning recommendation(s) unless specifically excluded from the Scope of Engagement.

• Addressing Implementation Responsibilities. A CFP^® professional must establish with the Client whether the CFP^® professional has implementation responsibilities. When the CFP^® professional has implementation responsibilities, the CFP^® professional must communicate to the Client the recommendation(s) being implemented and the responsibilities of the CFP^® professional, the Client, and any third party with respect to implementation.
• Identifying, Analyzing, and Selecting Actions, Products, and Services. A CFP^® professional who has implementation responsibilities must identify and analyze actions, products, and services designed to implement the recommendations. The CFP^® professional must consider the basis for each selection, which must include:
  • How the action, product, or service is designed to implement the CFP^® professional’s recommendation; and
  • The advantages and disadvantages of the action, product, or service relative to reasonably available alternatives.
• Recommending Actions, Products, and Services for Implementation. A CFP^® professional who has implementation responsibilities must recommend one or more actions, products and services to the Client. The CFP^® professional must discuss with the Client the basis for selecting an action, product, or service, the timing and priority of implementing the action, product, or service, and disclose and manage any Material Conflicts of Interest concerning the action, product, or service.
• Selecting and Implementing Actions, Products, or Services. A CFP^® professional who has implementation responsibilities must help the Client select and implement the actions, products, or services. The CFP^® professional must discuss with the Client any Client selection that deviates from the actions, products, and services the CFP^® professional recommended.

The new Code and Standards sets forth, in Standard C, a principles-based documentation requirement that applies when a CFP^® professional provides or is required to provide Financial Advice in accordance with the Practice Standards. A CFP^® professional must act prudently in documenting and retaining information, as the facts and circumstances require, taking into the account the significance of the information, the need to preserve the information in writing, the obligation to act in the Client’s best interests, and the CFP^® Professional’s Firm’s policies and procedures.

When completing Steps 4, 5 and 6 of the Financial Planning process, a CFP^® professional may consider documenting the following information in writing, where relevant:

• The CFP^® professional’s analysis of the Client’s current course of action;
• The CFP^® professional’s analysis of potential alternative courses of action;
• The assumptions and estimates used in developing the recommendations;
• The recommendations the CFP^® professional selects and the rationale for the recommendations;
• The basis for the selection of actions, products, and services; and
• Actions the Client takes that deviate from the CFP^® professional’s recommendations.

The principles-based documentation requirement in the Code and Standards does not require the CFP^® professional to provide the information to the Client. A CFP^® professional may memorialize information in a method of the CFP^® professional’s choosing, and retain the information in, among other places, a client file, a Contact Management System file, a paper file, or a digital vault.