Ethics and the CFP® Certificant · CFP® certificant, June 2010 (certificate #151953) 8 April 2016 3. First: Who Am I? Previous 2001‐2012: Vice President for

Ethics and the CFP® Certificant:Material Elements, Required Disclosures, and Fiduciary Standards

Johann Klaassen, PhD, CFP®, AIF®[email protected]

8 April 2016 1

Disclosure / DisclaimerJohann Klaassen is both an ACCREDITED INVESTMENTFIDUCIARY™ professional and also a CERTIFIED FINANCIALPLANNER™ certificant.

He is an Investment Advisor Representative of Horizons Sustainable Financial Services, Inc. Horizons Sustainable Financial Services, Inc., is a Registered Investment Advisor that is incorporated and registered in the State of New Mexico. In accordance with federal law, we may only conduct business in states where appropriately registered or exempted from registration.

Fi360, Inc, owns the certification marks AIF® and ACCREDITED INVESTMENTFIDUCIARY™ in the US. Attainment of the AIF credential demonstrates understanding of the Prudent Practices and methodology.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Johann does not personally own any shares of any of the specific companies he might mention in the course of this presentation.

Nothing in this presentation should be interpreted as investment advice, or as an offer to buy or sell securities.

Any performance figures contained herein are based on information sources believed to be reliable, and are not to be interpreted as a guarantee of future results.

The views expressed herein are my own, and not those of Horizons Sustainable Financial Services.

Asset allocation and diversification strategies cannot assure profit or fully protect against loss. Indices mentioned are unmanaged and cannot be invested into directly.

28 April 2016

First: Who Am I?

AcademicBA, Saint John’s College (Santa Fe) –Great Books (1992)

PhD, Washington University (St Louis) – Philosophy (Ethics & Social Phil, 1998)

ProfessionalAIF® certificant, November 2003 (certificate #70)

CFP® certificant, June 2010(certificate #151953)

38 April 2016

First: Who Am I?

Previous2001‐2012: Vice President for Investment Services

First Affirmative Financial Network

Colorado Springs

Current2013: Chief Investment Officer & Executive Vice President

Horizons Sustainable Financial ServicesSanta Fe, NM & Palmer Lake, CO

48 April 2016

Horizons Sustainable Financial Services

Money holds power.

There is a key component of Sustainable, Responsible, Impact Investing that brings light to that power. By leveraging the economic influence of the more than 3 trillion dollars invested by regular people like you and me, we can be a major catalyst for change in our world.

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2016 Ethics CE Learning ObjectivesUpon successful completion of the program, the student should be able to:

1. Define and discuss a financial planning engagement, material elements of financial planning, and the financial planning process.2. Analyze specific fact patterns to determine if a financial planning relationship exists.

3. Differentiate between the standards of care set forth in Rules 1.4 and 4.5 of the Rules of Conduct, and apply each standard of care to specific factual situations.4. Apply each Practice Standard set forth in the Financial Planning Practice Standardsto a hypothetical financial planning engagement.

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5. Identify the information that must be disclosed to the client in writing by a CFP® professional who is engaged in a financial planning relationship or providing material elements of financial planning.6. Define the required information that must be disclosed to clients and prospective clients, when that information must be disclosed, and apply each disclosure requirement to specific factual situations. (This includes but is not limited to the compensation and conflict‐of‐interest disclosure requirements set forth in Rule 2.2 of the Rules of Conduct and Practice Standards 100‐1, 400‐3, and 500‐1.)

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Session Plan:Hour 1:

Setting the Stage: Fact Patterns

Objectives, restated:1. What Is Financial Planning? (cases)2. Is This Financial Planning? (cases)

5. Required Written Disclosures6. All Other Required Disclosures

Hour 2:Quick Review: Fact Patterns

Objectives, restated:3. “Client’s Interest”, “Suitability”, and Fiduciary Duties (cases)4. Practice Standards and Practical Application (cases)

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Case Summary / Fact Pattern

Zack is a young CFP® Professional, working for the RIA arm of a regional broker‐dealer. He’s been in the business for almost 10 years, and has held the CFP® certification for a little more than four.

Over the course of a totally typical Monday morning, he meets with three new prospects: Abbie, Barry, and Claire.

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Fact Pattern: Abbie• 30 years old• College education• Recently divorced• 2 kids: 5 and 3• Non‐profit fundraising

“I’ve never really been in charge of money before, so I need help … I don’t know, with budgets and credit cards and the like. Can you help me?”

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Fact Pattern: Barry• 47 years old• College education• Married (21 years)• 3 kids (18, 15, 11)• Middle management, manufacturing

“I just changed jobs – a move up, really. But I want to roll my old 401k over to … uh, to an IRA. Can you help with that? Oh, and what do you think of a Roth IRA, instead?”

118 April 2016

Fact Pattern: Claire• 65 years old• BA, MSW• Married 2 years – 30 year

relationship• No kids• Social worker, ready to

retire

“I need help to sort out my Social Security and other retirement income questions, and maybe want to look at ways to make sure that Viviane is taken care of when I pass. We never thought we would be married – how does that change what can we do?”

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1. What Is “Financial Planning”?

Financial planning engagements exist when our activities “are considered financial planning or material elements of financial planning” —criteria which the CFP Board have intentionally left at least somewhat vague.

[See the FAQ document for the Standards, Question 1‐10 (p. 7).]

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1. What Is “Financial Planning”?

SIX STEPS

1. Establish and mutually define relationship

2. Gather data3. Analyze and evaluate4. Develop and present plan5. Implement plan6. Monitor plan

SEVEN SUBJECT AREAS

1. Financial Statement Prep2. Insurance Needs & Planning3. Employee Benefits Planning4. Investment Planning5. Tax Planning6. Retirement Planning7. Estate Planning

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Under the definition of “financial planning,” the Standards provide guidance CFP® professionals may use to determine whether they are providing financial planning. The factors are:• The client's understanding and intent in

engaging the CFP® professional• The degree to which multiple financial planning

subject areas are involved• The comprehensiveness of data gathering• The breadth and depth of recommendationsThe criteria above focus on the integration of the six steps with two or more financial planning subject areas.

A certificant’s activity may rise to the level of material elements of financial planning if the CFP® professional’s activities include one or more of the following:• Employing multiple financial planning subject

areas to analyze a client’s financial situation• Gathering information about a client’s entire

financial situation, including goals• Recommending a broad financial plan requiring

a depth of technical knowledge to execute the plan

• Mutually defining the scope of the engagement with a client where the client understands and intends to engage the CFP® professional in financial planning

Given the in‐depth process used in this example, CFP Board would likely consider the CFP® professional in the above‐mentioned activity to be providing financial planning or material elements of financial planning.

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[See the FAQ document for the Standards, Question 1‐13 (pp. 8‐9).]

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1. What Is (Not) “Financial Planning”?Activities that CFP Board would not likely consider to be material elements of financial planning include:• Opening an account or completing an application• Fact‐finding to meet regulatory requirements for suitability such as the "Know Your

Customer" rules• Solely providing brokerage and/or insurance products or services• Engaging in activity solely related to the sale of a specific product• Acting as a mortgage broker without providing any other financial services• Completing tax returns without providing any other financial services• Teaching a financial class or continuing education programThe above are examples and should not be considered an all‐inclusive list.

[See the FAQ document for the Standards, Question 1‐8 (p. 7).]

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2. Is This Financial Planning?

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2. Is This Financial Planning? — Abbie

What’s the key question we need to ask Abbie?

“‘Budget planning’ can mean a lot of things. What do you think we should be doing here?”

“Oh, right now I just need help setting up a system I can use to keep my money moving in the right direction. Maybe later we’ll get to that other stuff.”

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2. Is This Financial Planning? — Barry

What’s the key question we need to ask Barry?

“The rollover is easy, but … Well, Roth conversion depends on your tax situation. Should we look at that, too?”

“Oh, you can do tax stuff, too? Yeah, let’s look at that, sure. Say, how much of my financial history are you going to need? Do you want to see stuff about my kids’ trusts, too?”

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2. Is This Financial Planning? — ClaireWhat’s the key question we need to ask Claire?

“Do you need a thorough financial plan? You have questions about Social Security, insurance, retirement, taxes, estate, and more, right?”

“Well, Viviane has always taken care of our budget, so we may not need help with that, and I’m not working any more, but … I should probably see if Viviane can come in, too, shouldn’t I?”

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5 & 6: Required DisclosuresThe CFP Board has collected their disclosure requirements into this single document.

Well, most of them.

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5 & 6: Rule 2.2 Disclosures: All Engagements“A certificant shall disclose to a prospective client or client the following information:”

a. An accurate and understandable description of the compensation arrangements being offered. This description must include: i. Information related to costs and

compensation to the certificant and/or the certificant’semployer, and

ii. Terms under which the certificant and/or the certificant’s employer may receive any other sources of compensation, and if so, what the sources of these payments are and on what they are based.

b. A general summary of likely conflicts of interest between the client and the certificant, the certificant’s employer or any affiliates or third parties, including, but not limited to, information about any familial, contractual or agency relationship of the certificant or the certificant’s employer that has a potential to materially affect the relationship.

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c. Any information about the certificant or the certificant’semployer that could reasonably be expected to materially affect the client’s decision to engage the certificant that the client might reasonably want to know in establishing the scope and nature of the relationship, including but not limited to information about the certificant’s areas of expertise.

d. Contact information for the certificant and, if applicable, the certificant’s employer.

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e. If the services include financial planning or material elements of financial planning, these disclosures must be in writing. The written disclosures may consist of multiple written documents. Written disclosures used by a certificant or certificant’s employer that includes the items listed above, and are used in compliance with state or federal laws, or the rules or requirements of any applicable self‐regulatory organization, such as the Securities and Exchange Commission’s Form ADV or other disclosure documents, shall satisfy the requirements of this Rule.

The certificant shall timely disclose to the client any material changes to the above information.

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5 & 6: Rule 2.2 Disclosures: All Engagements

Comments:• If the engagement includes “financial planning or material elements of

financial planning”, these disclosures need to be in writing; otherwise, oral disclosure is okay. Best practice: disclose in writing.

• Much of this information is in your Form ADV (parts 1(a) and 2(a)). It should also appear in any “Scope of Engagement” document, “Financial Planning Agreement”, and “Investment Advisory Agreement”. The CFP Board encourages but does not require the use of their templates (Form OPS, Form FPD, and Form FPDA).

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5 & 6: Other Disclosures: All Engagements

Rule 2.1 — “A certificant shall not fail to disclose or otherwise omit facts where that disclosure is necessary to avoid misleading clients.”

Rule 4.7 — “A certificant shall advise his or her current clients of any certification suspension or revocation he or she receives from CFP Board.”

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5 & 6: Financial Planning Engagements (1.2)“[T]he certificant shall provide written information or discuss with the prospective client or client”:

a. The obligations and responsibilities of each party under the agreement with respect to:

i. Defining goals, needs and objectives,ii. Gathering and providing appropriate data,iii. Examining the result of the current course

of action without changes,iv. The formulation of any recommended

actions,v. Implementation responsibilities, andvi. Monitoring responsibilities.

b. Compensation that any party to the agreement or any legal affiliate to a party to the agreement will or could receive under the terms of the agreement; and factors or terms that determine costs, how decisions benefit the certificant and the relative benefit to the certificant.

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5 & 6: Financial Planning Engagements (1.2)“[T]he certificant shall provide written information or discuss with the prospective client or client”:

c. Terms under which the agreement permits the certificant to offer proprietary products.

d. Terms under which the certificant will use other entities to meet any of the agreement’s obligations.

If the certificant provides the above information in writing, the certificant shall encourage the prospective client or client to review the information and offer to answer any questions that the prospective client or client may have.

Comments:• Can be discussed verbally; best

practice suggests written disclosures.• Much of this information is in your

Form ADV (parts 1(a) and 2(a)). It should also appear in any “Scope of Engagement” document, “Financial Planning Agreement”, and “Investment Advisory Agreement”. The CFP Board encourages but does not require the use of their templates (Form OPS, Form FPD, and Form FPDA).

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5 & 6: Financial Planning Engagements (1.3)

If the services include financial planning or material elements of financial planning, the certificant or the certificant’s employer shall enter into a written agreement governing the financial planning services (“Agreement”). The Agreement shall specify: a. The parties to the Agreement,b. The date of the Agreement and its duration,c. How and on what terms each party can terminate the Agreement, andd. The services to be provided as part of the Agreement.

The Agreement may consist of multiple written documents. Written documentation that includes the items above and is used by a certificant or certificant’s employer in compliance with state or federal law, or the rules or regulations of any applicable self‐regulatory organization, such as the Securities and Exchange Commission’s Form ADV or other disclosure documents, shall satisfy the requirements of this Rule.

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5 & 6: Disclosures — Abbie

Which disclosures may we make to Abbie verbally?

Which disclosures must be made to Abbie in writing?

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5 & 6: Disclosures — Barry

Which disclosures may we make to Barry verbally?

Which disclosures must be made to Barry in writing?

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5 & 6: Disclosures — Claire

Which disclosures may we make to Claireverbally?

Which disclosures must be made to Claire in writing?

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RECAP:2016 Ethics CE Learning ObjectivesSo far, we’ve covered:

1. Define and discuss a financial planning engagement, material elements of financial planning, and the financial planning process.2. Analyze specific fact patterns to determine if a financial planning relationship exists.

5. Identify the information that must be disclosed to the client in writing by a CFP® professional who is engaged in a financial planning relationship or providing material elements of financial planning.6. Define the required information that must be disclosed to clients and prospective clients, when that information must be disclosed, and apply each disclosure requirement to specific factual situations. (This includes but is not limited to the compensation and conflict‐of‐interest disclosure requirements set forth in Rule 2.2 of the Rules of Conduct and Practice Standards 100‐1, 400‐3, and 500‐1.)

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Ethics and the CFP® Certificant:Material Elements, Required Disclosures, and Fiduciary Standards

Johann Klaassen, PhD, CFP®, AIF®[email protected]

8 April 2016 38

Quick Reminder: Hour 2Review: Fact Patterns

Objectives, restated:3. “Client’s Interest”, “Suitability”, and Fiduciary Duties (cases)4. Practice Standards and Practical Application (cases)

398 April 2016

Fact Pattern: Abbie• 30 years old• College education• Recently divorced• 2 kids: 5 and 3• Non‐profit fundraising

“I’ve never really been in charge of money before, so I need help … I don’t know, with budgets and credit cards and the like. Can you help me?”

408 April 2016



418 April 2016

Fact Pattern: Claire• 65 years old• BA, MSW• Married 2 years – 30 year

relationship• No kids• Social worker, ready to

retire

“I need help to sort out my Social Security and other retirement income questions, and maybe want to look at ways to make sure that Viviane is taken care of when I pass. We never thought we would be married – how does that change what can we do?”

428 April 2016


3. Differentiate between the standards of care set forth in Rules 1.4 and 4.5 of the Rules of Conduct, and apply each standard of care to specific factual situations.

4. Apply each Practice Standard set forth in the Financial Planning Practice Standardsto a hypothetical financial planning engagement.

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3. Standards of Care

Rule 1.4:“A certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciaryas defined by CFP Board.”

Rule 4.5:“In addition to the requirements of Rule 1.4, a certificant shall make and/or implement only recommendations that are suitablefor the client.”

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It appears to me that we have three levels here:

1. All clients: “A certificant shall at all times place the interestof the client ahead of his or her own”. (1.4)

2. All clients: “[A] certificant shall … make and/or implement only recommendations that are suitable for the client”. (4.5)

3. Financial Planning clients: “[T]he certificant owes to the client the duty of care of a fiduciary as defined by CFP Board”. (1.4)

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3. Standards of Care: Fiduciary

“Fiduciary”: One who acts in utmost good faith, in a manner he or she believes to be in the best interest of the client.

[See the Standards, “Terminology”.]

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3. Standards of Care: Fiduciary

“fi360 defines an investment fiduciary as someone who is providing investment advice or managing the assets of another person and stands in a special relationship of trust, confidence, and/or legal responsibility.”

“Who Is Fiduciary?” — http://www.fi360.com/prudent‐investment‐process/who‐is‐fiduciary

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3. Standards of CareQuestion 2‐1: Why doesn't CFP Board just say that all CFP® professionals are fiduciaries?

The Standards require that all CFP® professionals who provide financial planning services will be held to the duty of care of a fiduciary, as defined by CFP Board. Since some CFP® professionals are not involved in providing financial planning services to clients, it would be inappropriate to hold these individuals to a duty of care that may not apply to their professional activities. While CFP Board’s fiduciary standard is reserved for financial planning services, the Standards nevertheless require a high duty of care for all CFP® professionals in any type of client relationship: "A CFP® professional shall at all times place the interest of the client ahead of his or her own." [See Rule 1.4]

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SuitabilityWhen your broker recommends that you buy or sell a particular security, your broker must have a reasonable basis for believing that the recommendation is suitable for you. In making this assessment, your broker must consider your income and net worth, investment objectives, risk tolerance, and other security holdings.

[SEC Definition of “suitability” — http://www.sec.gov/answers/suitability.htm]

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For All Clients:Follow Rule 1.4:

A certificant shall at all times place the interest of the client ahead of his or her own.

For Financial Planning Clients:Act as a “Fiduciary”:

One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.

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The “Common View” of Fiduciary Status

A “fiduciary relation” establishes a situation in which various professionals “in equity and good conscience” are “bound to act in good faith and with due regard to the interests of the one reposing the confidence.” When professionals are viewed as fiduciaries, they are thought to be bound to act as if their interests were those of their client and hence to sacrifice their own interests for the sake of their clients’ interests.

— Larry May, The Socially Responsive Self: Social Theory and Professional Ethics (U Chicago Press, 1996), pp. 135‐36.

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Fiduciary Relationship Models

Whatever may be the models that obtain in other legal cultures, the client‐lawyer relationship in the United States is founded on the lawyer’s virtually total loyalty to the client and the client’s interests.

— Charles Wolfram, Modern Legal Ethics (West Publishing, 1986), p. 146.

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“Interests”?

Unrealistic:• How can I objectively determine your interests? Your “best” interests?

• How can I completely shut out my own interests? Does the question even make sense?

Deceptive:• Doesn’t this view create a false expectation of perfect loyalty?

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What Is to Be Done?

More Rules / Regs / Practices?These represent minimal standards of professional behavior.• Rules and regs restrict and

control conduct — but “are made to be broken”

• “Practices” give us a checklist to follow — but don’t always help us do the best thing

Or Shift to Fiduciary Virtues?These represent professional ideals for which we should strive.• Fidelity• Intelligence (φρόνησις)• Diligence• Effectiveness & Efficiency

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To recap:

1. All clients: “A certificant shall at all times place the interestof the client ahead of his or her own”. (1.4)

2. All clients: “[A] certificant shall … make and/or implement only recommendations that are suitable for the client”. (4.5)

3. Financial Planning clients: “[T]he certificant owes to the client the duty of care of a fiduciary as defined by CFP Board”. (1.4)

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Fact Pattern: Abbie

Which standard of care should we apply to our interactions with Abbie?

Which fiduciary virtue is most likely to apply to her situation?

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Fact Pattern: Barry

Which standard of care should we apply to our interactions with Barry?

Which fiduciary virtue is most likely to apply to his situation?

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Fact Pattern: Claire

Which standard of care should we apply to our interactions with Claire?

Which fiduciary virtue is most likely to apply to her situation?

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4. Practice Standards: Application

“Apply each Practice Standard set forth in the Financial Planning Practice Standards to a hypothetical financial planning engagement.”

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4. Apply each Practice Standard …

1. Establishing and defining the relationship with a client 100‐1 Defining the Scope of the Engagement

2. Gathering client data200‐1 Determining a Client's Personal and Financial Goals, Needs and Priorities

200‐2 Obtaining Quantitative Information and Documents

3. Analyzing and evaluating the client's financial status 300‐1 Analyzing and Evaluating the Client's Information

4. Developing and presenting financial planning recommendations

400‐1 Identifying and Evaluating Financial Planning Alternative(s)

400‐2 Developing the Financial Planning Recommendation(s)

400‐3 Presenting the Financial Planning Recommendation(s)

5. Implementing the financial planning recommendations

500‐1 Agreeing on Implementation Responsibilities500‐2 Selecting Products and Services for Implementation

6. Monitoring 600‐1 Defining Monitoring Responsibilities

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4. Apply each Practice Standard

Let’s work through Barry’s situation with the Compliance Checklist …

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100‐1: Defining the Scope of the EngagementWhat Zack Did: What Zack Should Do:

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200‐1: Determining a Client's Personal and Financial Goals, Needs and PrioritiesWhat Zack Did: What Zack Should Do:

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200‐2: Obtaining Quantitative Information and DocumentsWhat Zack Did: What Zack Should Do:

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300‐1: Analyzing and Evaluating the Client's InformationWhat Zack Did: What Zack Should Do:

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400‐1: Identifying and Evaluating Financial Planning Alternative(s)What Zack Did: What Zack Should Do:

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400‐2: Developing the Financial Planning Recommendation(s)What Zack Did: What Zack Should Do:

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400‐3: Presenting the Financial Planning Recommendation(s)What Zack Did: What Zack Should Do:

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500‐1: Agreeing on Implementation ResponsibilitiesWhat Zack Did: What Zack Should Do:

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500‐2: Selecting Products and Services for ImplementationWhat Zack Did: What Zack Should Do:

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600‐1: Defining Monitoring Responsibilities

What Zack Did: What Zack Should Do:

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Can Zack Be Rehabilitated?

It seems like Zack has gotten himself into some bad habits — he may not be on the right side of the law in every instance, and certainly seems to violate the CFP Board’s rules.

Do we, collectively, think he’s likely to be able to right this ship?

Might a new focus on fiduciary virtues help him?

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