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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
Relationship Between Law and Ethics
Relationship Between Law and Ethics
• 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
Relationship Between Law and Ethics
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)
Certified Financial Planning Board
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.
Certified Financial Planning Board
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.
Certified Financial Planning Board
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.
Certified Financial Planning Board
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.
Certified Financial Planning Board
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.
Certified Financial Planning Board
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.
Certified Financial Planning Board
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.
Description of Practice Standards
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.
Description of Practice Standards
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
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.
Developing and Presenting the Financial Planning
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.
Developing and Presenting the Financial Planning
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.
Developing and Presenting the Financial Planning
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
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.
The American College Code of Ethics: Eight Canons
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
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?
Professional Behavior
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
Financial Planning Process Steps and Corresponding Practice
Standard(s)
• Developing and presenting a plan
400-1 I.D. alternatives
400-2 Develop recommendation
400-3 Present recommendation
Financial Planning Process Steps and Corresponding Practice
Standard(s)
• Implementing the plan
500-1 Agreeing on implementing responsibilities
500-2 Selecting products and services for implementation
Financial Planning Process Steps and Corresponding Practice
Standard(s)
• Monitoring the plan
600-1 Defining monitoring responsibilities
Financial Planning Process Steps and Corresponding Practice
Standard(s)
Chapter Three Review
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?
Chapter Three Review
• CFP Board® steps in financial planning process and corresponding practice standards
Chapter Three Review