New Disclosure Obligations For Informed Consent And Other Reporting Requirements Under CFP Board’s New Standards Of Conduct

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EXECUTIVE SUMMARY

One of the fundamental challenges that professionals face when providing recommendations to consumers is that the recipient may struggle to fully understand the ramifications of their decision about whether or not to accept and follow the recommendation in the first place. After all, professionals tend to be engaged with respect to matters that are especially complex or challenging – such that the average person cannot make the decision quickly or effectively on their own, and must rely on the services of a professional. Yet, in a world where consumers still must give their consent to pursue recommendations that may have adverse outcomes, it’s hard to be certain the consumer really understands enough to give their “informed” consent in complex matters in the first place. Accordingly, various professions have evolved over time the framework of what it takes to ensure a consumer is giving “informed consent” – to act on a recommendation made by the professional with full awareness of the potential risks that it may entail.

And in its latest update to its Standards of Conduct, the CFP Board will now require that CFP professionals obtain informed consent with respect to any recommendations they make to clients that may entail a Material Conflict of Interest, to be certain that the Client truly understands the prospective conflict before deciding whether to engage the CFP professional. In practice, this will entail not only providing upfront information about the CFP professional’s services and compensation (which may be delivered orally for Financial Advice engagements but must be written for Financial Planning engagements) but also disclosures of the CFP professional’s Material Conflicts of Interest (which may be oral or written), and obtaining the Client’s informed consent (by any means desired, though clearly for professional liability protection, CFP professionals will likely want to document this in writing!).

Fortunately, the reality is that for most CFP professionals individually, such disclosure documents will have already been created as their Form ADV Part 2 (for an RIA), or by their broker-dealer (as a registered representative), such that few will have to create new and separate documents themselves. Nonetheless, being aware of the obligation to provide such information and disclosures, and in particular, the burden to obtain informed consent (and a likely desire to document it, either with contemporaneous notes in the advisor’s CRM or perhaps with a delivery-and-acknowledgment receipt), means CFP professionals will still need to be cognizant of what it takes to comply with the new rules.

In turn, the CFP Board’s new Standards of Conduct also expand the obligations of CFP professionals to report external disciplinary matters to the CFP Board, comply with CFP Board investigations, and adhere to the CFP Board’s Terms and Conditions. Recognizing that, in the end, the CFP marks are not a formal license (and the CFP Board is not a government-sanctioned regulator), but CFP professionals who pay the CFP Board to use the CFP marks still, in the process, agree to adhere to the CFP Board’s rules… providing the CFP Board with the means to ensure that CFP professionals uphold the Board’s rules of professionalism, or risk having their CFP marks suspended or permanently revoked!


Michael KitcesAUTHOR: MICHAEL KITCES
TEAM KITCES

Michael Kitces is Head of Planning Strategy at Buckingham Wealth Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors.

In addition, he is a co-founder of the XY Planning NetworkAdvicePayfpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

As a part of its new Standards of Conduct first approved on March 28th of 2018, effective on October 1st of 2019, and to be enforced beginning on June 30th of 2020, the CFP Board will impose new obligations on CFP professionals with respect to how they manage and disclose Conflicts of Interest to clients, provide Engagement information to clients, and report disciplinary matters to the CFP Board itself (and cooperate with its Terms and Conditions and its investigations).

The crux of these obligations is to ensure both that prospective clients of CFP professionals have a clear understanding of the Scope of Engagement, the nature of Engagement, and any relevant factors that may impact the advice received pursuant to that Engagement… and that the CFP Board remain apprised of situations where CFP professionals should be disciplined for failing to adhere to the CFP Board’s Standards and for giving inappropriate advice.


Providing Requisite Information About Services And Compensation To Clients (And Prospects)

One of the core requirements of the previously-6-step-now-7-step financial planning process is to clearly establish the scope of the relationship with the Client, which includes both making the Client aware of the services the CFP professional provides (and what they cost), and any other pertinent information that the Client would need to make an informed decision about engaging the CFP professional’s services.

However, the CFP Board’s Standards of Conduct provide differing requirements about the depth and breadth of the CFP professional’s description of services and supporting information, depending on whether the CFP professional is providing (comprehensive) financial planning advice (to which the full Financial Planning Practice Standards would apply), or instead is simply providing “Financial Advice” instead, which is broadly defined as covering:


“Financial Advice” is…

  1. 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 with respect to:
    1. The development or implementation of a financial plan;
    2. The value of or the advisability of investing in, purchasing, holding, gifting, or selling Financial Assets;
    3. Investment policies or strategies, portfolio composition, the management of Financial Assets, or other financial matters; or
    4. The selection and retention of other persons to provide financial or Professional Services to the Client; or
  2. The exercise of discretionary authority over the Financial Assets of a Client.

In the case of such broad-based “Financial Advice” (that does not require the full Financial Planning Practice Standards), the CFP professional must provide the following information to the Client, either prior to or at the time of Engagement:

1) Services and Products. Description of services and/or products to be provided;

2) How the Client Pays. How the Client will pay for the products and services received, and a description of the additional types of costs that the Client may incur, including product management fees, surrender charges, and sales loads (though notably, a description of how the CFP professional will be compensated is sufficient, without exact detail of the precise percentages or amounts, which may vary depending on the exact solution implemented);

3) How the CFP Professional (and Related Parties) are compensated. How the CFP professional, the CFP Professional’s Firm, and any Related Party, are compensated for providing the products and services;

4) Public Discipline or Bankruptcy. The existence of any public discipline or bankruptcy, and the location(s), if any, of the webpages of all relevant public websites of any governmental authority, self-regulatory organization, or professional organization that sets forth the CFP professional’s public disciplinary history, or any personal bankruptcy or business bankruptcy where the CFP professional was a Control Person;

5) Material Conflicts of Interest. The information required under the obligation to disclose Material Conflicts of Interest (as discussed earlier);

6) Privacy Policy. The information required regarding “Written Notice Regarding Non-Public Personal Information” (i.e., maintaining privacy and confidentiality of client information, as discussed separately as part of a CFP professional’s 15 Duties to Clients);

7) Referral Compensation Arrangements. Disclosure of Economic Benefit for Referral or Engagement of Additional Persons (i.e., revenue-sharing and other referral compensation agreements, as discussed separately as part of a CFP professional’s 15 Duties to Clients); and

8) Any Other Material Information. Any other information about the CFP professional or the CFP Professional’s Firm that is Material to a Client’s decision to engage or continue to engage the CFP professional or the CFP Professional’s Firm.

Notably, this required information and related disclosures must be delivered before or at the time of a Financial Advice Engagement but does not have to be delivered in a written format. Oral disclosure of this information is permitted, though the CFP professional is still required to document that the information was, in fact, provided in a timely manner. On the other hand, CFP professionals who prefer to deliver the information in writing may still do so, including via email (or with directions to the client on where to obtain that information via the advisor’s website) if the client has otherwise consented to email communications.

On the other hand, when a full-fledged Financial Planning Engagement occurs (i.e., where the Financial Planning Practice Standards apply because the CFP professional is providing Financial Planning, providing sufficiently broad Financial Advice that incorporates multiple integration factors, or causes the Client to have a reasonable basis to believe he/she will receive Financial Planning), the CFP Professional must not only provide the aforementioned information, but is also expected to formalize the “terms of the Engagement” between the Client and the CFP professional (or his/her firm), including the Scope of Engagement and any limitations, the period(s) during which the services will be provided, and the Client’s responsibilities.

Formal documentation of the scope of the engagement is especially important in the context of a Financial Planning Engagement, as by default, a CFP professional is presumed to be responsible for implementing, monitoring, and updating the Financial Planning recommendation(s) as well unless those duties are specifically excluded from the Scope of Engagement.

In addition, when the CFP professional is engaged for Financial Planning, all of the information above (except the disclosure of Material Conflicts of Interest) must be provided in writing and not just orally. However, per the separate oral-or-written obligation for disclosure of Material Conflicts of Interest, the CFP professional will still have the option to provide oral (as opposed to written) disclosure of those Material Conflicts of Interest.

While the above information to be provided is effectively information for prospects (i.e., delivered before or at the time of an Engagement itself) and not for clients (after it would already be past the due date for delivery by the time they are engaged clients!), the Duty to Provide Information to A Client also includes an ongoing obligation to provide updated information to clients.

Specifically, in the event that there is a Material change or update to the information required to be provided to the Client, the advisor must disclose/provide that information to the Client within 90 days. In addition, any changes to the advisor’s public disciplinary history or bankruptcy information must also be disclosed to the Client within 90 days of when such an event occurs.

 

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