Financial Planning and Application of the Practice Standards for the Financial Planning Process

In the new Code and Standards, CFP Board incorporates a shorter Financial Planning definition that is more user-friendly, without sacrificing clarity. The revised Financial Planning definition, which is set forth in both the Glossary and Standard B.1 of the new Standards of Conduct, consists of 30 carefully chosen words:

Financial Planning is a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances.

To best understand this new definition, it is helpful to consider each element in succession:

• “Financial Planning is a collaborative process”: CFP Board is committed to the fundamental principle that Financial Planning is a “process,” not a document or product. The Practice Standards provide the roadmap. (See Standard C.) Collaboration between the CFP® professional and the Client, and potentially others, is critical to the process.
• “That helps maximize a Client’s potential”: The goal of Financial Planning is to help maximize the Client’s potential. In developing the definition, CFP Board carefully considered a long list of alternatives to “maximize,” including achieve, advance, enhance, foster, further, improve, increase, optimize, realize, and support. CFP Board determined that “maximize” is the word that best fits the definition because the goal of a CFP® professional providing Financial Planning is to make the most out of the Client’s potential. Maximize is qualified by “helps” and modifies the Client’s “potential,” but does not guarantee any specific financial performance.
• “For meeting life goals”: The purpose of Financial Planning is to develop and meet goals. The goal is to obtain what the Client wants in life. Financial goals are one means to that end, not the end itself. Therefore, defining the goals as “financial goals” would be too narrow.
• “Through Financial Advice”: Financial Advice is the financial planner’s tool. While a financial planner is focused on life goals, the advice that a financial planner provides is Financial Advice.
• “That integrates relevant elements of the Client’s personal and financial circumstances”: “Integration” is essential to Financial Planning. The process requires integration of relevant elements of the Client’s personal and/or financial circumstances. A financial planner examines a Client’s circumstances and evaluates how one element of the Client’s life may affect other elements. Relevant elements of a Client’s personal and financial circumstances vary from Client to Client, and may include the Client’s need for or desire to: develop goals, manage assets and liabilities, manage cash flow, identify and manage risks, identify and manage the financial effect of health considerations, provide for educational needs, achieve financial security, preserve or increase wealth, identify tax considerations, prepare for retirement, pursue philanthropic interests, and address estate and legacy matters.

(Originally Published:  November 27, 2018)

The Standards of Professional Conduct that will remain in effect through September 30, 2019 requires a CFP® professional to comply with the Financial Planning process when providing Financial Planning or material elements of Financial Planning. The new Code and Standards eliminates the concept of “material elements of Financial Planning.” Instead, the new Code and Standards specifies – in Standard B.3 – three circumstances in which a CFP® professional must comply with the Practice Standards:

1. 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 A.10.b.ii.
2. 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. Another FAQ discusses the factors that CFP Board will examine to determine whether integration is required.
3. 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.

(Originally Published:  November 27, 2018)

There are three circumstances when a CFP® professional must provide Financial Planning, and therefore must comply with the Practice Standards for the Seven-Step Financial Planning Process (Standard B.3.): 

1. The CFP® professional agrees to provide or provides Financial Planning;
2. 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 (“Financial Advice that Requires Financial Planning”); or
3. The Client has a reasonable basis to believe the CFP® professional will provide or has provided Financial Planning

The Integration Factors: This FAQ focuses on the second of these three circumstances: whether the CFP® professional has provided Financial Advice that Requires Financial Planning. CFP Board has established five specific “Integration Factors” that CFP Board will weigh in making that determination:

a. The number of relevant elements of the Client’s personal and financial circumstances that the Financial Advice may affect;

b. The portion and amount of the Client’s Financial Assets that the Financial Advice may affect;

c. The length of time the Client’s personal and financial circumstances may be affected by the Financial Advice;

d. The effect on the Client’s overall exposure to risk if the Client implements the Financial Advice; and

e. The barriers to modifying the actions taken to implement the Financial Advice.

Additional Duties When Financial Planning is Required: If, based on the Integration Factors, the CFP® professional is providing Financial Advice that requires Financial Planning, then the CFP® professional must comply with the Practice Standards for the Seven-Step Financial Planning Process. As set forth in Standard C., the Practice Standards for the Financial Planning Process are as follows:

Step 1: Understanding the Client’s Personal and Financial Circumstances

Step 2: Identifying and Selecting Goals

Step 3: Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action

Step 4: Developing the Financial Planning Recommendation(s)

Step 5: Presenting the Financial Planning Recommendation(s)

Step 6: Implementing the Financial Planning Recommendation(s)

Step 7: Monitoring Progress and Updating

In complying with the Practice Standards, a CFP® professional must act prudently in documenting information, as the facts and circumstances require, taking into 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.

If a CFP® professional is required to provide Financial Planning, then under the Duty to Provide Information to a Client (Standard A.10.), most of the information that the CFP® professional may have provided to the Client orally (or in writing) when providing Financial Advice now must be delivered to the Client in writing, in one or more written documents. In addition, the CFP® professional also must provide to the Client, in writing, the terms of the Engagement between the Client and the CFP® professional or the CFP® Professional’s Firm, including the Scope of Engagement and any limitations, the period(s) during which the services will be provided, and the Client’s responsibilities. The CFP® professional also is responsible for Implementing the Financial Planning Recommendations (Step 6 of the Financial Planning Process) and Monitoring Progress and Updating (Step 7 of the Financial Planning Process) unless specifically excluded from the Scope of the Engagement. (Originally Published:  January 16, 2020)

Answer B.3.3.: No. The Code of Ethics and Standards of Conduct (Standard B.1-6 and Glossary) expressly recognizes that a CFP® professional may provide:

a. Information that does not constitute Financial Advice (the provision of services or the furnishing or making available of marketing materials, general financial education materials, or general financial communications that a reasonable CFP® professional would not view as Financial Advice),

b. Financial Advice (a communication that, based on its content, context, and presentation, would reasonably be viewed as a recommendation that the Client take or refrain from taking a particular course of action) that does not require Financial Planning, and

c. Financial Advice that requires Financial Planning (Financial Advice that requires integration of relevant elements of the Client’s personal and/ or financial circumstances to act in the Client’s best interests).

Thus, CFP Board recognizes that a CFP® professional is not required to provide Financial Planning in every Client Engagement.

No. FINRA’s Know Your Customer Rule calls for collecting certain types of information about a Client. Financial Planning is more than the collection of information. CFP Board’s new integration factors, which are set forth in Standard B.4 of the new Standards of Conduct, set forth the circumstances in which a CFP® professional must provide Financial Planning.  (Originally Published:  November 27, 2018)

CFP Board will weigh the following five factors, which are set forth in Standard B.4.:

1. The number of relevant elements of the Client’s personal and financial circumstances that the Financial Advice may affect. This factor requires a CFP® professional to review the Financial Advice the CFP® professional will provide to the Client and determine how many of the Client’s needs or wants the Financial Advice may affect. Financial Advice concerning one relevant element of the Client’s personal and financial circumstances may (or may not) be sufficient to require Financial Planning.
2. The portion and amount of the Client’s Financial Assets that the Financial Advice may affect. This factor requires a CFP® professional to review the Financial Advice the CFP® professional will provide to the Client and determine the portion and amount of the Client’s Financial Assets the Financial Advice may affect. This factor focuses on both the portion and amount of Financial Assets. The effect on Financial Assets is just one factor that CFP Board would weigh in conjunction with others.
3. The length of time the Client’s personal and financial circumstances may be affected by the Financial Advice. This factor requires the CFP® professional to assess the length of time the Financial Advice may affect the Client’s personal and financial circumstances.
4. The effect on the Client’s overall exposure to risk if the Client implements the Financial Advice. Relevant risks include investment risk, interest rate risk, and inflation risk.
5. The barriers to modifying the actions taken to implement the Financial Advice. This factor requires the CFP® professional to assess how difficult it would be for the Client to unwind or modify the action taken to implement the Financial Advice.

(Originally Published:  November 27, 2018)

No. CFP Board does not identify a minimum number of “relevant elements” for an Engagement to be considered Financial Planning. While it is more likely that Financial Planning is required when several of the relevant elements of the Client’s personal and financial circumstances are involved, in some cases a Financial Planning Engagement may exist even when only one of the “relevant elements” is involved. The “relevant elements” are identified in Standard B.2 of the new Code and Standards. CFP Board has developed a five-factor test for determining whether Financial Planning is required, which is set forth in Standard B.4 of the new Code and Standards and is addressed in another FAQ.  (Originally Published:  November 27, 2018)

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 four options. As set forth in Standard B.6 of the new Code and Standards, the CFP® professional must either:

1. Not enter into the Engagement;
2. Limit the Scope of Engagement to services that do not require application of the Practice Standards, and describe to the Client the services the Client requests that the CFP® professional will not be performing;
3. Provide 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, in which case the CFP® professional is not required to comply with the Practice Standards; or
4. Terminate the Engagement.

Not all options will apply under all circumstances. To illustrate these options, assume that a Client seeks Financial Advice on three topics, and that, under the Code and Standards, a CFP® professional otherwise would be required to provide Financial Planning to provide that Financial Advice. Assume further that the Client declines to engage the CFP® professional for Financial Planning.

Under the first option, the CFP® professional may decide not to enter into the Engagement. Under the second option, the CFP® professional may limit the Scope of the Engagement to one topic if that would not require Financial Planning and inform the Client that the CFP® professional will not be providing Financial Advice on the other two topics.

Under the third option, if the CFP® professional informs the Client how Financial Planning would benefit the Client and how the Client’s decision not to engage the CFP® professional to provide Financial Planning may limit the CFP® professional’s Financial Advice, then the CFP® professional may provide Financial Advice on all three topics without being required to comply with the Practice Standards. The CFP® professional continues to be required to act as a fiduciary when providing that Financial Advice.  (Originally Published:  November 27, 2018)