by Chris Beard, CFP®, and Edward Mora, CFP®
While the fiduciary obligation of those who provide financial advice continues to dominate the discourse in our industry, since July 2008, CFP® professionals have been required to abide by a fiduciary standard of care when engaged in financial planning for a client. The primary goal of this article is to provide viewpoints on how a fiduciary standard applies to key components of the financial planning process. The observations and best practices that emerge are intended to assist the financial planning community at large, regardless of the CFP professional’s business model or compensation structure.
“Fiduciary,” as defined by CFP Board, means “one who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.” With this definition as a backdrop, we will highlight the six-step financial planning process and the Financial Planning Practice Standards, and point out areas where we have seen CFP professionals run into issues. We will also review select anonymous case histories to illustrate the application of the fiduciary standard in real-world terms.
Scope of Engagement
A vitally important aspect of adhering to the fiduciary standard is the written scope of engagement, as defined by Practice Standard 100-1. We have seen time and again financial planners falling short in providing clients this essential document. We consider it the foundational document that sets forth the parameters of work with the client, and thus not only serves the client with regard to their understanding of the engagement but also protects the planner by explicitly describing the advice to be given. A well-drafted scope of engagement will also identify the services that will not be provided or delivered; to this end, we believe a best practice is to provide a written engagement letter even if the scope does not include financial planning (for example, is limited to investment management only). This goes to the heart of “holding out” oneself as a CFP professional—if you include the CFP marks in your collateral, showcasing yourself to clients as adhering to a higher level of education and experience, you should assume that clients think they are in a financial planning relationship, even if you are providing only investment management.
How Clients See You
In living up to the fiduciary standard, some important questions to ask are: (1) What is the client’s understanding in working with the CFP professional, (2) What is the breadth of services provided, and (3) What level of data gathering is planned?
CFP Board’s Disciplinary and Ethics Commission (DEC) heard a case where a financial plan was used as a marketing tool to attract clients, but was not an accurate deliverable. The CFP professional’s intent seemed good, in that it appeared the potential client was in desperate need of financial planning advice. Even though this case occurred prior to the effective date of the enforcement of the revised Standards, which was January 2009, the DEC evaluated the case after the hearing to determine whether it would have been treated differently under the revised Standards.
By attempting to educate the client with one aspect of planning (multiple retirement analyses, which were poorly created and later revised with more accurate information), the CFP professional was holding himself out as a financial planner. Therefore, he was engaged in a financial planning relationship because that was the client’s understanding. As professionals, we are the party with superior knowledge in the relationship; therefore, it’s our job to be clear with clients as to when planning is actually being done, and not put the clients in a position of guessing. Ultimately, the DEC determined that had the revised Standards been in place when this case came before it, the CFP professional would have received higher discipline. There were a number of best practices that were not met—most importantly, a written scope of engagement, which is now a requirement in a financial planning relationship.
A fiduciary must also document required written disclosures. In real-life planning, one might not be operating under an RIA, so Form ADV would not be applicable to satisfy CFP Board’s disclosure requirements. To meet CFP Board’s requirement of disclosure, if you are in a financial planning engagement but within a brokerage or insurance relationship, you need to have a prepared summary document that discloses compensation and conflicts of interest that is on par with Form ADV.
As a fiduciary in a financial planning engagement, the accurate gathering of client data is critical. Ask yourself: Have I documented and discussed thoroughly any unrealistic goals and objectives? Have I documented any gaps in the data?
What if a CFP professional is missing data? The DEC had one such case in which there was a significant gap in data in the financial planning engagement. The CFP professional had done planning work for a client; he was further hired to advise and negotiate a contract on behalf of the client, who was considering leaving for a new company. As the CFP professional represented to the client that contract negotiation was one of many services he offered, the DEC concluded that the CFP professional was in a continuing financial planning engagement with the client.
In the process, the CFP professional represented that the tax deferability of non-qualified deferred compensation benefits would continue. However, the CFP professional was not able to obtain plan documents before providing the advice and, consequently, caused the client to incur substantial tax liability. The CFP professional did not limit the scope of the engagement to exclude advice on this aspect of planning, nor did he mandate that the client provide this information in order for him to complete the planning process.
This brings us to another important point: as a fiduciary in a financial planning engagement, there are moments when a CFP professional must be the “bad guy.” The DEC has seen numerous cases where the CFP professional was concerned about making the client mad, thus losing the business. This cannot be the primary concern though. In the end, the client is dissatisfied. Often, this can be avoided by better communication with the client, and a periodic reassessment of the relationship. This is challenging work, but as a fiduciary with a duty to act in the best interest of the client, a planner must understand his or her limitations, deliver bad news when necessary, and even walk away from engagements where sufficient data cannot be gathered.
When analyzing client data (Practice Standards (PS) Series 300), the planning software used will document assumptions in the deliverable. Again, a financial plan deliverable is not a marketing tool. How can one properly analyze at a fiduciary level of care if client data is not accurate?
The DEC sometimes sees the lack of a process (as defined in PS Series 400) being used by the CFP professional. This is needed to document the efficacy of the client’s current course versus recommended alternatives. In the suggested alternatives, what were the pros and cons identified? While there are most likely opportunities for improvement, how did the CFP professional operating under a fiduciary duty document the rationale for change? Is it clear how the cost/benefit analysis and recommendations are designed to meet client goals and objectives?
As implementation occurs, documentation of each party’s responsibilities for implementation needs to be clear (PS Series 500). Additionally, disclosure and documentation of conflicts of interest, sources of compensation, and material information not previously disclosed must occur at this step in the process. We recommend discussion of several points that may seem apparent—for example, in working for a bank as a fiduciary, did the CFP professional disclose that she can only offer her bank’s loans? The same can be said of an insurance company, brokerage firm, etc. We’ve found this to be a best practice, and client trust increases as a result.
Lastly, in monitoring recommendations (PS Series 600), one must document each party’s role. Often, there are items addressed in the plan that the CFP professional does not recommend or handle for the client. As a fiduciary, it is vital to discuss and document the items a client might reasonably expect the planner to be responsible for, such as who is responsible for watching an ancillary stock position.
Regardless of business model, a CFP professional must treat every client in a financial planning engagement with the care of a fiduciary. The notion of “holding out” is vitally important—if a CFP professional assumes that a client always believes he or she is in a financial planning relationship, it becomes obvious that an absolute best practice is to document when you are not in a financial planning engagement (for example, investment management only). Ultimately, executing a financial planning engagement as a fiduciary requires more work, disclosure, and documentation. But with the guiding light of always working in the client’s best interest, is there really any other way?
Chris Beard, CFP®, 2012 chair of CFP Board’s Disciplinary and Ethics Commission, is a vice president at Gateway Wealth Strategies in Greenville, South Carolina.
Edward Mora, CFP®, 2011 chair of CFP Board’s Disciplinary and Ethics Commission, is a vice president and wealth management market leader at Bank of the West in Newport Beach, California, and a member of the Journal of Financial Planning Advisory Board.