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New Code of Ethics and Conduct Standards Approved by CFP Board

Under a new, expanded scope of the fiduciary standard, CFP professionals will be required to act in the best interest of the client at all times when providing financial advice.  

The new Code of Ethics and Standards of Conduct was announced March 29 by the Board of Directors for the Certified Financial Planner Board of Standards, Inc. 

The new standards are set to become effective on Oct. 1, 2019. According to the Board’s announcement, there will be a “thorough process” to educate CFP professionals and other stakeholders on the new code. The 18-month period between the announcement and the effective date was intended to be responsive to concerns raised by CFP professionals and their firms, who requested a reasonable transition window to adjust their current operational systems in order to be accountable for the new standards.

The CFP Board’s website includes links to the new standards, a side-by-side comparison of the new code versus the existing code, a redlined version showing the actual changes in the document and a commentary document to provide context to the changes.

The CFP Board took a bold step more than a decade ago in requiring a fiduciary duty when CFP professionals provide financial planning services. We are raising the bar even higher now with a fiduciary standard that will apply anytime a CFP professional gives financial advice,” notes Richard Salmen, Chair of CFP Board’s Board of Directors. “This is a monumental step forward in the evolution of not just CFP certification, but for the profession of financial planning. Consumers, advisors and firms alike will all benefit from these new Standards,” Salmen adds.

All’ Financial Advice

The explanatory documents go out of their way to emphasize that the expansion of the application of fiduciary duty pertains to all financial advice. The CFP Board explains that the new code and standards help clarify that a CFP is committed to acting as a fiduciary at all times when providing financial advice – not just when providing financial planning – as is the case under the current standards. As a result, this should eliminate any confusion concerning the applicable standard whenever the CFP provides both types of services, the Board notes.

This includes “discretionary authority as well as communications that would be viewed as a recommendation that the client take or refrain from taking a particular course of action with respect to a wide range of financial matters.”

Communications that do not fall within that definition, such as responses to directed orders, would not be financial advice, according to the explanation. The definition also excludes 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.

In addition, the revised standards seek to provide greater clarity by offering more detailed requirements for the financial planning process. For example, the “Scope of the Engagement” standard that originally served as the first step in the process is now captured elsewhere in the code and standards, resulting in the financial planning process solely addressing the delivery of financial planning.

The updated code and standards also require a CFP to work with the client to mutually define the client’s goals after obtaining information and assessing their personal and financial circumstances — and not before, as the practice standards currently require.

The Board also separated developing recommendations and presenting recommendations into seven distinct steps to more clearly reflect their differences and the importance of each to the financial planning process.

As part of that process, an almost entirely new Monitoring Progress and Updating standard requires a CFP to:

  • address monitoring and updating responsibilities (including by communicating specific information to the client concerning the scope of the respective responsibilities);

  • monitor the client’s progress;

  • obtain current qualitative and quantitative information; and

  • update goals, recommendations, or implementation decisions.

The standard makes clear that several of the requirements apply only when the CFP has monitoring or updating responsibilities.

Fee-only and Fee-based

The new code and standards also address two specific compensation representations: fee-only and the term fee-based, which the previous standards did not specifically address. The Board explains that some members of the public are interested in working with a fee-only financial planner, which has created an incentive for a CFP professional (and others) to describe their compensation method that way.

To that end, the Board notes that it has had standards for more than two decades that dictate when a CFP professional may represent the CFP professional’s or the CFP Professional’s Firm’s compensation method as “fee-only.”

The Board further explains that the term “fee-based” is frequently used in the profession, but does not have a universally accepted meaning. At CFP Board public forums, some commenters apparently suggested prohibiting use of the term, but the Board said it decided not to take that approach and instead chose to set requirements for using the term fee-based, making clear that it is equivalent to “commission and fee.”

Under the new standard, a CFP professional who represents his or her or their firm’s compensation method as fee-based must not use the term in a manner that suggests the CFP or the professional’s firm is fee-only, and must clearly state either that the CFP or the professional’s firm earns both fees and commissions, or are not fee-only. According to the explanatory document, this standard also applies to other terms that, like fee-based, may be confused with a fee-only compensation method.