The 15 (Fiduciary) Duties To Clients That CFP Professionals Must Comply With

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EXECUTIVE SUMMARY

CFP professionals – like any professional – are expected to give advice in the best interests of their clients. Both as a hallmark of professionalism, and simply because it’s good business to do so. Yet in practice, it’s not enough to just say that CFP professionals are fiduciaries; professional adherence requires setting forth clear Standards of Conduct about how, exactly, CFP professionals are expected to deliver their services in a fiduciary manner, so the CFP Board can determine when a CFP professional is not meeting their obligations and may need to be disciplined… or, at worst, have their CFP marks suspended or revoked.

To provide clear guidance, the CFP Board’s new Standards of Conduct delineate a series of 15 Duties To Clients that CFP professionals must adhere to, from the Fiduciary Duty to Clients itself, to an obligation for providing key information and relevant disclosures of Material Conflicts of Interest, confidentiality obligations, the duty to uphold core professional principles including Integrity, Competence, and Diligence, as well as entirely new Duties regarding the selection of external professionals (to which the CFP professional may refer clients) and even the selection of technology itself.

In addition, the CFP Board’s new Standards also establish new guidance in previously controversial areas, particularly with respect to how CFP professionals disclose their compensation, and the use of compensation disclosures as a marketing term (e.g., the “Fee-Only” label)… not to induce CFP professionals towards any mode of compensation in particular, but simply to ensure that whatever compensation methodology the CFP professional chooses, that they are accurate in how they describe their prospective compensation to their Clients.

In the end, the 15 Duties Owed To Clients by CFP professionals are not meant to impose substantial new obligations on CFP professionals – and in reality, are commonly followed and generally recognized as best practices anyway. Still, though, by enumerating the 15 Duties as part of the Standards of Conduct itself, the CFP Board both provides additional guidance to CFP professionals on what they are expected to do as a matter of not just “best” but standard practices… and also establishes the grounds by which CFP professionals may be disciplined for failing to meet the minimum standard of their professional duties!


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.


The 15 Duties To Clients That All CFP Professionals Must Follow

The CFP Board’s new Standards of Conduct, which first took effect in October of 2019 and will be enforced as of June 30th of 2020, imposed for the first time a new “fiduciary at all times” Standard on CFP professionals. As while in the past, CFP professionals were ‘only’ required to be fiduciaries when providing Financial Planning or material elements of Financial Planning (but not merely for just ‘being’ a CFP professional providing advice and recommendations to clients), the new rules require CFP professionals to adhere to a fiduciary duty any time they provide Financial Advice to clients (regardless of whether full Financial Planning was required or not).

However, the CFP Board’s Standards of Conduct obligate CFP professionals to more than ‘just’ a fiduciary obligation to act in the best interests of their clients. As a fiduciary obligation alone guides CFP professionals on the ultimate Standard to which they will be held accountable… but not necessarily to the specific duties that CFP professionals are expected to fulfill in order to meet that obligation.

Accordingly, the CFP Board’s new Standards of Conduct is actually a series of 15 “Duties Owed To Clients” that all CFP professionals must adhere to, regardless of whether providing Financial Planning or non-Financial-Planning Financial Advice, in order to fully meet their obligations to clients who have engaged them for professional services.

15 Duties Owed To Clients
  1. Fiduciary Duty to Clients
  2. Disclose and Manage Conflicts of Interest
  3. Providing Information to Clients (and Prospects)
  4. Communicating (Clearly) with Clients
  5. Integrity
  6. Competence
  7. Diligence
  8. Sound and Objective Professional Judgment
  9. Professionalism
  10. Confidentiality and Privacy
  11. Properly Representing Compensation Method
  12. Due Diligence Duties When Recommending, Engaging, and Working with Additional Persons
  13. Comply with the Law
  14. Duties When Selecting, Using, and Recommending Technology
  15. Not Borrowing From, Lending To, or Commingling Financial Assets with Clients

Failure to follow the CFP Board’s 15 Duties Owed To Clients (or the Duties owed to Firm and Subordinates, or the Reporting and other Duties owed to the CFP Board itself) will result in potential disciplinary action, which may include Private Censure, a Public Letter of Admonition, suspension, or in the extreme, revocation of the CFP marks. In addition, failure to adhere to the CFP Board’s Practice Standards when delivering financial planning can also trigger disciplinary action.

1) FIDUCIARY DUTY TO CLIENTS

The anchor of the new Standards of Conduct – as embodied by literally being the first enumerated Duty to clients – is the obligation to act as a fiduciary acting in the best interests of the Client at all times when providing Financial Advice.

More specifically, the new Fiduciary obligation for CFP professionals entails three underlying Duties that the CFP professional must fulfill:
a) Duty of Loyalty. The Duty of Loyalty specifically requires that the CFP professional must:

  1. Place the interests of the Client above the interests of the CFP professional and the CFP Professional’s Firm;
  2. Avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the Client, obtain the Client’s informed consent, and properly manage the conflict; and
  3. Act without regard to the financial or other interests of the CFP professional, the CFP Professional’s Firm, or any individual or entity other than the Client, which means that a CFP professional acting under a Conflict of Interest continues to have a duty to act in the best interests of the Client and place the Client’s interests above the CFP professional’s.

b) Duty of Care. The CFP Board’s Duty of Care requires that the CFP professional must:

Act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the Client’s goals, risk tolerance, objectives, and financial and personal circumstances.

c) Duty to Follow Client Instructions.The CFP Board’s Duty to Follow Client Instructions requires that the CFP professional must:

Comply with all objectives, policies, restrictions, and other terms of the Engagement and all reasonable and lawful directions of the Client.
Notably, the end result of these ‘sub-Duties’ of the Fiduciary Duty is that CFP professionals are not only generally expected to act in the best interests of their clients, but they should only provide advice in areas in which they are competent to advise (i.e., they can provide services with the care, skill, prudence, and diligence of a professional).

On the other hand, in situations where the Client themselves disregards the CFP professional’s Best-Interests advice, and then asks the CFP professional to implement on action contrary to their own advice, the CFP professional still is expected to and has an obligation to follow the Client’s instructions (presuming they are otherwise reasonable and legal in the first place). In other words, CFP professionals are not obligated to terminate clients who refuse to take their advice or choose a different course of action instead.

2) DISCLOSE AND MANAGE CONFLICTS OF INTEREST

To the extent that a CFP professional faces (Material) Conflicts of Interest in providing advice to clients (and/or in how they are compensated for that advice and implementation), the CFP Board’s Standards of Conduct require that:
When providing Financial Advice, a CFP professional must make full disclosure of all Material Conflicts of Interest with the CFP professional’s Client that could affect the professional relationship. This obligation requires the CFP professional to provide the Client with sufficiently specific facts so that a reasonable Client would be able to understand the CFP professional’s Material Conflicts of Interest and the business practices that give rise to the conflicts, and give informed consent to such conflicts or reject them.

Such disclosures do not have to be delivered in writing (i.e., oral disclosure is permitted, as long as it is still given before providing Financial Advice), but are required to encompass the full scope of the CFP professional’s Engagement with a Client (and thus may go beyond the standalone required disclosures of FINRA broker-dealers and/or RIAs via Form ADV Part 2).

In addition, to the extent the CFP professional does retain a Material (and now disclosed) Conflict of Interest, they are expected to try to manage and mitigate the impact of that Conflict:
A CFP professional must adopt and follow business practices reasonably designed to prevent Material Conflicts of Interest from compromising the CFP professional’s ability to act in the Client’s best interests.

3) PROVIDING INFORMATION TO CLIENTS (AND PROSPECTS)

Establishing the Scope of an Engagement is a fundamental requirement for any and every professional, as it’s only by clearly defining (and often, limiting) the Scope of Engagement that the professional can ensure their ability to render all of their agreed-upon duties at a professional level. After all, if the CFP (or any) professional commits to do ‘everything’ for the Client, at some point there’s a risk that the professional operates outside their primary domain of skill (putting them in breach of their Duty of Care to clients).

In the context of the new CFP Board Standards of Conduct, the first Duty of CFP professionals when it comes to defining the Scope of Engagement is simply an obligation to provide to clients all the information they would need to know in order to make a decision about a prospective Engagement, including providing information with respect to:

  • The CFP professional’s Services and Products (description of services and/or products to be provided);
  • How the Client Pays (for any products and services rendered);
  • How the CFP Professional (and Related Parties) are compensated;
  • Public Discipline or Bankruptcy (including relevant government agencies or regulatory authorities that may report on disciplinary matters);
  • Material Conflicts of Interest (as discussed earlier);
  • Privacy Policy (regarding “Written Notice Regarding Non-Public Personal Information”);
  • Referral Compensation Arrangements (i.e., revenue-sharing and other referral compensation agreements, as discussed later); and
  • Any Other Material Information.

In the case of broad-based “Financial Advice” (that does not require the full Financial Planning Practice Standards), the CFP professional must provide the information to the Client either prior to or at the time of Engagement, but may provide the information orally (though the CFP professional is still expected to document that the information was in fact provided in a timely manner).

However, when a full-fledged Financial Planning Engagement occurs (where the Financial Planning Practice Standards apply), the CFP professional must not only provide the aforementioned information in written format (except for Material Conflicts of Interest that may remain orally disclosed), but is also expected to formalize the “terms of the Engagement” between the Client and the CFP professional (or their 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 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.

Notably, the Duty to Provide Information to Clients also includes an ongoing obligation to provide updated information. 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.

4) COMMUNICATING (CLEARLY) WITH CLIENTS

Although common amongst CFP professionals simply as a good business practice, the new CFP professional Standards of Conduct do explicitly require that CFP professionals communicate clearly with clients.

Specifically, the Standard requires that CFP professionals provide accurate information, communicate in accordance with the Scope of the Client Engagement (i.e., provide timely advice or responses to questions/topics in which the CFP professional is engaged), and respond to reasonable client requests in a manner and format that the Client reasonably may be expected to understand.

While in practice, the Clear-Communication Duty should be fairly straightforward for CFP professionals to comply with, it is both an important reminder about clearly defining the Scope of Engagement (if only to make clear what the CFP professional is and is not expected to communicate about in a timely manner), and that communication must occur in a manner and format that clients can understand. (Which, notably, means CFP professionals would be expected to make communication accommodations for clients who may be hearing or especially visually impaired.)

5) INTEGRITY

In the prior version of the CFP Board’s Code of Ethics and Professional Responsibility, the CFP Board espoused a series of 7 Principles – Integrity, Objectivity, Competence, Fairness, Confidentiality, Professionalism, and Diligence – which, in the new version, are incorporated (in a restated manner) into the Code of Ethics and also codified in the new Standards of Conduct as a formal reflection of the exact duties expected of a CFP professional to their Client.

When it comes to the principle of integrity, the new Standards specifically require that:
1) A CFP professional must perform Professional Services with honesty and candor, which may not be subordinated to personal gain or advantage.

2) A CFP professional may not, directly or indirectly, in the conduct of Professional Services:

  1. Employ any device, scheme, or artifice to defraud;
  2. Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or;
  3. Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

In essence, the Integrity Standard means that the CFP professional must be truthful and candid with clients, and not engage in any actions that are misleading or make statements that are untrue. Notably, as the CFP Board acknowledges, “Allowance may be made for innocent error and legitimate differences of opinion”. However, “integrity cannot co-exist with deceit or subordination of principle.”

6) COMPETENCE

One of the core tenets of Professionalism and a Fiduciary Duty (under the Duty of Care) is to only provide advice in areas in which the professional is competent to provide advice in the first place.

This obligation for Competency is another that was previously embodied as one of the 7 Principles of the prior Code of Ethics and Professional Responsibility and has been expanded as one of the 15 Duties to Clients under the new Standards.

Under the new rules, the Competency Standard means providing professional services “with relevant knowledge and skill to apply that knowledge”.

A key aspect of the Competency Standard is that when a CFP professional does not have competency in a particular domain (e.g., whether it pertains to in-depth tax planning, a specialized domain like divorce planning, or a technical subject matter the CFP professional has limited knowledge and experience with, such as student loan planning), the CFP professional is expected to:

  • Gain competency;
  • Obtain assistance from a competent professional;
  • Limit the Scope of Engagement to exclude the topic;
  • Terminate the Engagement for being unable to fulfill the Engagement competently; or
  • Refer the Client out to a competent professional.

Notably, in the event that the CFP professional is not competent enough to provide services on a certain topic, the CFP professional is expected to clearly describe to the Client (and define in the Scope of Engagement) the services that will not be provided.

7) DILIGENCE

Another of the Principles of the prior Code of Ethics and Professional Responsibility was Diligence, and the expectation that a CFP professional will provide their services diligently.

The Oxford Dictionary defines being diligent as “having or showing care and conscientiousness in one’s work or duties”. And in fact, prior Kitces Research finds that financial planners as a whole tend to be well above average in their Conscientiousness (one of the ‘Big Five’ personality traits).

Nonetheless, as a professional Standard of Conduct, CFP professionals are expected to provide their Professional Services diligently, including responding to reasonable Client inquiries, in a timely and thorough manner.

8) SOUND AND OBJECTIVE PROFESSIONAL JUDGMENT

Going hand-in-hand with the fiduciary obligation of a Duty of Loyalty to act in the Client’s best interests is a responsibility to render professional services objectively, which was already part of the prior Principles-based Code of Ethics and is now embodied in the new Standards of Conduct as a Duty to render services to the Client with Sound and Objective Professional Judgement.

Notably, the Objectivity Duty is not only a matter of trying to engage in sound judgment but also that the CFP professional must not engage in any actions that could compromise their Objective Professional Judgment. Accordingly, the CFP professional “may not solicit or accept any gift, gratuity, entertainment, non-cash compensation, or other consideration” that reasonably could be expected to compromise their Objectivity.

In practice, the limitations on gifts and gratuities under existing FINRA and SEC regulations would likely already comport to the obligation for CFP professionals to maintain (and not compromise) their Objectivity. Nonetheless, the obligation under the Objectivity Duty is not merely to “conform to other regulations regarding the non-acceptance of [large] gifts”, but that the CFP professional has an obligation to maintain their Objectivity and not accept gifts that may compromise it (even if those gifts were not prohibited by other regulatory bodies).

9) PROFESSIONALISM

Across virtually all recognized professions, there is a basic expectation that professionals act like ‘professionals’, and the new CFP Standards of Conduct are no different.

Accordingly, a CFP professional is expected to “treat Clients, prospective Clients, fellow professionals, and others with dignity, courtesy, and respect”.

Notably, the CFP Board’s disciplinary history and its Anonymous Case Histories do not include any incidents where “professionalism” (or lack thereof) alone was the basis for a disciplinary action, in part because, in the past, Professionalism was part of the Code of Ethics but not explicitly a Standard of Conduct. It remains to be seen what level of “unprofessionalism” would constitute enough to merit disciplinary action under the new Standards. But given that “Professionalism” is now actually embodied as a specific Standard of Conduct, it leaves the door open for potential disciplinary action (at least a Private Censure if not a Public Letter of Admonishment or more severe enforcement action) for unprofessionalism.

10) CONFIDENTIALITY AND PRIVACY

Maintaining both Confidentiality about Clients themselves, and Privacy regarding their private client information, is another staple of the standard obligations of professionals and is another area that the CFP Board converted from a prior Principle under the original Code of Ethics and Professional Responsibility, into a specific Standard of Conduct under the new rules.

In practice, the new CFP Board Standards of Conduct prescribe four core obligations with respect to Client Confidentiality and Privacy:

  • Maintain client confidentiality (and do not disclose any non-public personal information about prospective, current, or former clients);
  • Do not use non-public personal information about a Client for the CFP professional’s direct or indirect benefit (regardless of whether doing so is detrimental to the Client) unless the Client consents;
  • Take reasonable steps to protect the security of non-public personal client information; and
  • Adopt and implement policies and procedures regarding the protection, handling, and sharing of a Client’s non-public personal information, and share those policies and procedures in written format (e.g., as a Privacy Policy) with new clients at the time of Engagement and not less often than annually thereafter.

In this context, it’s important to recognize that protecting the security of private client information includes information stored both physically or electronically and, as such, ‘cybersecurity’ of client data is also effectively a requirement under CFP Board Standards, in addition to other regulators like the SEC and FINRA. And that whatever the advisor’s cybersecurity policies and procedures are, they’re expected to be shared annually with clients (upfront and annually thereafter).

On the other hand, the CFP Board guidance does indicate that firms already compliant with Reg S-P (which generally includes both broker-dealers and RIAs) or “substantially equivalent federal or state laws or rules” will be automatically deemed to meet the CFP Board’s policies-and-procedures requirement (and the annual Reg S-P privacy notice will satisfy the annual client notification process). Accordingly, the CFP Board’s Confidentiality obligations for privacy policies will generally only apply to those providing Financial Planning or Financial Advice services in unregulated roles (where Reg S-P or similar Federal or state privacy notice rules aren’t applicable). Though either way, such rules only excuse (or already cross-apply) towards the CFP certificant’s written-privacy-notification obligation; the remainder of the Confidentiality Duty continues to apply regardless.

However, it’s important to note that it is still appropriate to use non-public private client information under CFP Board rules for ordinary business purposes, including:

  1. With the client’s consent, so long as the client has not withdrawn the consent;
  2. To a CFP Professional’s Firm or other persons with whom the CFP professional is providing services to or for the client, when necessary to perform those services;
  3. As necessary to provide information to the CFP professional’s attorneys, accountants, and auditors; and
  4. To a person acting in a representative capacity on behalf of the client.

In other words, the Confidentiality rules are not meant to restrict a CFP professional’s ability to conduct their ‘normal’ business, including working with other outside professionals in joint work with clients, and those who are properly acting as representatives on behalf of the Client. As long as the CFP professional can properly affirm those outside individuals are properly engaged with or on behalf of the Client.

In addition, private client information may still be shared when proper for legal or enforcement purposes, including:

  1. To law enforcement authorities concerning suspected unlawful activities, to the extent permitted by the law;
  2. As required to comply with federal, state, or local law;
  3. As required to comply with a properly authorized civil, criminal, or regulatory investigation or examination, or subpoena or summons, by a governmental authority;
  4. As necessary to defend against allegations of wrongdoing made by a governmental authority;
  5. As necessary to present a civil claim against, or defend against a civil claim raised by, a client;
  6. As required to comply with a request from CFP Board concerning an investigation or adjudication; and
  7. As necessary to provide information to professional organizations that are assessing the CFP professional’s compliance with professional standards.

In other words, while client Confidentiality and Privacy should be maintained, CFP professionals are still expected to work productively with regulators and law enforcement, whether regarding a bona fide investigation pertaining to the Client themselves (e.g., in the case of suspected unlawful activities), or an investigation against the advisor pertaining to a particular client.

In addition, the CFP professional is also expected and required to comply with the CFP Board’s own investigation and adjudication process, for which client Confidentiality and Privacy is not a valid excuse to refuse to provide information (at least under CFP Board confidentiality rules, though CFP professionals must still be certain to comply with FINRA, SEC, or other regulatory guidelines that may apply to them, even in the case of a CFP Board investigation and request for information).

11) PROPERLY REPRESENTING COMPENSATION METHOD

As noted earlier, one of the fundamental requirements of being a fiduciary is to avoid Conflicts of Interest, and where such Conflicts are unavoidable, to at least take steps to mitigate them, disclose them to the Client, and obtain informed consent from the Client. Which means clients must have a clear understanding of the advisor’s prospective Conflicts of Interest, including the compensation that advisors may receive that gives rise to such Conflicts.

And in practice, the increasingly high profile of compensation descriptions (and especially the “Fee-Only” label) in recent years, combined with the rising number of disciplinary actions for improper use of those compensation labels, led the CFP Board’s Commission on Standards to revisit and ultimately revise the rules for Compensation disclosures going forward.

At their core, the new Standards of Conduct still require that CFP professionals only use the “Fee-Only” label if their compensation is in fact only from fees and not commissions, stating that:
Fee-Only. A CFP professional may represent his or her or the CFP Professional’s Firm’s compensation method as “fee-only” only if:

  1. The CFP professional and the CFP Professional’s Firm receive no Sales-Related Compensation; and
  2. Related Parties receive no Sales-Related Compensation in connection with any Professional Services the CFP professional or the CFP Professional’s Firm provides to Clients.

In turn, the new rules explicitly prohibit CFP professionals from using “’fee-based’ or any other similar term that is not fee-only… in a manner that suggests the CFP professional or the CFP professional’s firm is fee-only”. Instead, regardless of whether the firm is utilizing a fee-based Engagement for at least a subset of accounts with clients, if the CFP professional is not Fee-Only, they “must clearly state that either the CFP professional or the CFP Professional’s Firm earns fees and commissions, or that the CFP professional or the CFP Professional’s Firm are not fee-only”.

Notably, in the new “Fee-Only” Compensation definition, the key requirement is not that the advisor only received compensation from a series of specified types of fees (e.g., AUM fees, hourly or flat project fees, monthly subscription or retainer fees, etc.), but instead that the CFP professional does not receive any “sales-related” (i.e., commission) compensation.

In turn, Sales-Related Compensation for the purposes of Compensation disclosures is defined as:
Sales-Related Compensation. Sales-Related Compensation is more than a de minimis economic benefit, including any bonus or portion of compensation, resulting from a Client purchasing or selling Financial Assets, from a Client holding Financial Assets for purposes other than receiving Financial Advice, or from the referral of a Client to any person or entity other than the CFP® Professional’s Firm. Sales-Related Compensation includes, for example, commissions, trailing commissions, 12b-1 fees, spreads, transaction fees, revenue sharing, referral or solicitor fees, or similar consideration.
Not surprisingly, the core of the definition of “Sales-Related Compensation” is around commissions that are generated from a client purchasing or selling financial assets (e.g., the traditional sales or transaction-related commission), or similar payments on an ongoing basis for continuing to hold such assets (e.g., levelized commissions that continue to be paid after the original sale). As the CFP Board’s own definition notes, this may include (upfront) commissions, trailing commissions such as 12b-1 fees, spreads (e.g., for individual bond transactions), and other transaction fees.

However, it’s important to recognize that the proper use of the “Fee-Only” label means not only that the CFP professional themselves receive no “sales-related compensation”, but also that no related parties receive such compensation in connection with the CFP professional’s services. In this context, “Related Party” and “In Connection With” are defined as:

Related Party. A person or business entity (including a trust) whose receipt of Sales-Related Compensation a reasonable CFP professional would view as directly or indirectly benefiting the CFP professional or the CFP Professional’s Firm.

In Connection with any Professional Services. Sales-Related Compensation received by a Related Party is “in connection with any Professional Services” if it results, directly or indirectly, from Client transactions referred or facilitated by the CFP professional or the CFP Professional’s Firm.
In other words, the mere fact that a Related Party earns/generates Sales-Related Compensation (e.g., commissions) is not enough alone to run afoul of the rules.

Otherwise – especially given the Related Party rules for family members – a CFP professional might lose their eligibility to claim “Fee-Only” status because their brother happens to be a health insurance agent, or their spouse is a real estate agent, or the family owns a mortgage business… all scenarios where family members are receiving “sales-related compensation” (in their respective jobs/businesses).

Instead, when it comes to Related Parties, the receipt of Sales-Related Compensation only counts when it is received “in connection with any Professional Services” that the CFP professional (or his/her firm) actually provides to Clients.

On the other hand, to help more clearly separate out situations where family members or other related businesses may earn commissions in their own roles not actually connected at all to the CFP professional’s clients and services provided, the CFP Board provides a “safe harbor” exception:

Safe Harbor for Related Parties. Sales-Related Compensation received by a Related Party is not “in connection with any Professional Services” if the CFP professional or the CFP Professional’s Firm adopts and implements policies and procedures reasonably designed to prevent the CFP professional or the CFP Professional’s Firm from recommending that any Client purchase Financial Assets from or through, or refer any Clients to, the Related Party.

12) DUE DILIGENCE DUTIES WHEN RECOMMENDING, ENGAGING, AND WORKING WITH ADDITIONAL PERSONS

One of the key aspects of the CFP professional’s fiduciary Duty of Care to act with “the care, skill, prudence, and diligence that a prudent professional would exercise” is the implicit expectation that CFP certificants only serve in areas in which they have the skills and are capable of providing a professional level of care in the first place. In other words, where CFP professionals are not capable of acting with the requisite care and skill (and prudence and diligence), they are expected to not render services, and limit the scope of the Engagement with the Client and/or involve outside professionals who can render that level of care.

However, CFP professionals still have both a duty to ensure that when ‘additional persons’ are brought into (or referred out from) the client Engagement, that reasonable due diligence has been done to affirm the quality of the professional being referred.

Accordingly, under the new rules, CFP professionals must:

  1. When engaging or recommending the selection or retention of additional persons to provide financial or Professional Services for a Client:
    1. Have a reasonable basis for the recommendation or Engagement based on the person’s reputation, experience, and qualifications;
    2. Exercise reasonable care to protect the Client’s interests.

As with other ‘principles-based’ professional obligations, the CFP Board does not explicitly specify what, exactly, CFP professionals are expected to do in order to satisfy this due diligence requirement when working with outside professionals.

Notably, the Standard does not require CFP professionals to actually investigate a related professional’s credentials, but simply that the CFP professional “have a reasonable basis for the recommendation or Engagement” based on that person’s “reputation, experience, and qualifications”.

Accordingly, in practice, the obligation is more about the CFP professional at least determining that the individual has reasonable credibility markers – e.g., if they’re going to be brought in for complex tax and business consulting, do they have a CPA license and some years of experience doing similar work, or if they’re going to conduct a complex insurance analysis, do they have CLU certification or similar qualifications and appropriate experience. Which, in turn, is part of a broader obligation to “exercise reasonable care to protect the Client’s interests” – i.e., not refer them to someone who themselves would not be anticipated to serve the Client well and/or may take advantage of the Client.

Accordingly, while not explicitly required, it would be advisable under this CFP Board Duty to at least note in the advisor’s CRM when establishing a new relationship with an outside professional what “reputation, experience, and qualifications” are being relied upon as a ‘reasonable basis’ for recommending or engaging them.

In addition to the upfront obligation regarding the “reasonableness” of engaging or recommending an outside professional, CFP certificants also have an ongoing obligation as well:
2. When working with another financial or Professional Services provider on behalf of a Client, a CFP professional must:

  1. Communicate with the other provider about the scope of their respective services and the allocation of responsibility between them; and
  2. Inform the Client in a timely manner if the CFP professional has a reasonable belief that the other provider’s services were not performed in accordance with the scope of services to be provided and the allocation of responsibilities.

In essence, the CFP professional, in coordinating with outside professionals, is expected to have productive communication about “who does what” and the allocation of responsibility (e.g., the CFP professional will assist in discussing the estate planning strategies with the Client, but the estate planning attorney will draft the documents for the Client, while the CFP professional will have an opportunity to provide feedback on those documents before they go to the Client to help ensure they align to the Client’s goals, and both the CFP professional and the estate planning attorney will be in the final meeting when the Client is ready to sign the documents, etc.).

Furthermore, CFP professionals are expected to notify the Client in the event that they discover outside service providers (that the CFP professional recommended or engaged in the first place) are not performing their duties as anticipated. However, even once the CFP professional brings in (or recommends out to) an outside party, they are not necessarily responsible for ongoing monitoring of the outside relationship. Nonetheless, if an issue does come to light, the CFP professional has an obligation to inform the Client at that point.

Ultimately, the key point is that when a CFP professional needs to (or under their Duty of Care, has an obligation to) engage in or recommend the Client over to an outside professional (e.g., a lawyer, accountant, insurance expert, investment expert, etc.), the CFP professional is not ultimately responsible for the outside provider’s work product, but does have an obligation to show a reasonable basis that the individual was qualified and capable of doing the work, that the scope of work for the professional is clear (relative to what the CFP professional remains responsible for doing), and that if the CFP professional discovers an issue in the process, the Client is informed accordingly.

However, in some cases, the relationship of engaging or referring out to outside professionals is more than ‘just’ a professional referral; it may be an established cross-referral relationship (with an expectation of reciprocation), and/or one in which money exchanges hands (e.g., an affiliate or solicitor arrangement). In such situations, the CFP professional not only has the obligations of determining the upfront reasonableness and ongoing working relationship with outside professionals but also must:

Disclose to the Client, at the time of the recommendation or prior to the Engagement, any arrangement by which someone who is not the Client will compensate or provide some other material economic benefit to the CFP professional, the CFP Professional’s Firm, or a Related Party for the recommendation or Engagement.

Notably, this disclosure requirement applies “at the time of the recommendation or prior to the Engagement”, which means even if the Client is already engaged, a subsequent recommendation/referral that has a remuneration component must still be disclosed to them (if it hadn’t already been disclosed upfront).

In addition, the requirement is not only to disclose outright compensation but anytime the CFP professional (or his/her firm or a related party) will receive “some other material economic benefit”, which might include an established quid pro quo cross-referral relationship. On the other hand, only “material” economic benefits must be disclosed, which ostensibly would not include informal cross-referrals that may happen or nominal gifts (e.g., a holiday gift basket received from an attorney or accountant who had received a referral from the CFP professional, etc.).

13) COMPLY WITH THE LAW

In addition to the fiduciary and other Duties that CFP professionals have as CFP professionals, as a (highly!) regulated industry, financial advisors are subject to numerous other regulators as well.

Accordingly, CFP professionals must also:

Comply with the laws, rules, and regulations governing Professional Services.

Of course, CFP professionals already have an obligation to comply with the laws and regulations that apply to financial advisors or risk losing their actual regulatory license to provide such services in the first place. Ultimately, the real point of having an obligation for CFP professionals to comply with the laws and regulations that may apply to them is that it means a CFP professional can potentially be sanctioned based on violations of the law or other regulators’ rules and regulations, even without the CFP Board investigating the matter directly themselves and determining that the financial advisor’s actions were also a violation of (other) Duties under the Standards of Conduct. Instead, a finding by the courts or another regulator that the CFP professional failed to comply with existing laws, rules, or regulations, is ipso facto a violation unto itself. (Which is important in regulatory matters that pertain to client privacy, where the CFP Board’s own ability to investigate directly may be limited, and/or as a matter of expediency to not ‘re-try’ a legal or regulatory matter that has already been tried in court or arbitration.)

In addition, the CFP Board’s obligation of CFP professionals to comply with the law applies not only to their direct activities but also to activities that may result in misconduct in which they are complicit with other (CFP or non-CFP) individuals, stating:

A CFP professional may not intentionally or recklessly participate or assist in another person’s violation of these Standards or the laws, rules, or regulations governing Professional Services.

On the other hand, it’s notable that the obligation to “Comply With the Law” – to the point that failing to do so is itself a violation of the Standards of Conduct – pertains only to the laws “governing Professional Services”. However, violations of other laws (e.g., drunk driving) that do not pertain to the financial services industry, and the advisor’s delivery of Professional Services, may still be in violation of the Duty Owed to CFP Board to Refrain From Adverse Conduct.

14) DUTIES WHEN SELECTING, USING, AND RECOMMENDING TECHNOLOGY

In the past, rendering professional services was primarily about the professional themselves rendering services according to their Duty of Care to act with “the care, skill, prudence, and diligence that a prudent professional would exercise”. In essence, to only provide advice in areas in which they have sufficient expertise and experience to advise.

However, in an increasingly technology-driven world, the reality is that financial advisors increasingly rely upon the technology they use to conduct substantive analyses of client needs in order to craft recommendations. Accordingly, as technology is becoming an extension of the financial advisor, the CFP professional’s due diligence obligation now extends to their selection of technology to use with clients:

A CFP professional must exercise reasonable care and judgment when selecting, using, or recommending any software, digital advice tool, or other technology while providing Professional Services to a Client.

Notably, the obligation of CFP professionals to assess their technology goes beyond just having a “reasonable basis” to believe that the software is appropriate, but that they actually “exercise reasonable care and judgment” when selecting, using, or recommending software.

Of course, the reality is that as licensed individuals (e.g., by FINRA, the SEC, or a state insurance department), regulators generally already impose non-trivial requirements on financial advisors in various channels to conduct appropriate due diligence on their technology, particularly from the perspective of cybersecurity and maintaining the integrity of client data and client privacy.

Accordingly, the due diligence on technology vendors conducted by broker-dealer and similar platforms would likely already suffice in meeting the reasonable care requirement for CFP professionals (assuming they do at least verify that their platform did such due diligence themselves), and to the extent an RIA is conducting its due diligence of a vendor’s cybersecurity practices with respect to non-public information of clients, such reviews should similarly satisfy the obligation under the CFP Board’s Standards of Conduct as well. (Though notably, those providing financial advice services as non-registered individuals – e.g., ‘financial coaches’ – may need to take additional steps to ensure they are meeting this technology vendor due diligence requirement.)

On the other hand, the obligation of CFP professionals to be diligent when selecting technology goes beyond ‘just’ the selection of the platform and its functionality (and protections for private client data):

A CFP professional must have a reasonable level of understanding of the assumptions and outcomes of the technology employed.

In other words, proper selection and due diligence of advisor technology go beyond just its cybersecurity and core features. Ultimately, to the extent that the software facilitates advice in particular – for instance, financial planning software used to craft recommendations, various “robo-advice” tools that gather and match client input to recommended portfolios, etc. – the financial advisor must actually have a ‘reasonable’ level of understanding of how the software arrives at the recommendations it makes (i.e., the assumptions it uses and how those lead to the outcomes it provides).

Notably, though, CFP professionals are not necessarily expected to independently audit and verify the calculations of software itself (beyond, as noted earlier, having exercised reasonable care and judgment in selecting a credible vendor in the first place). Still, CFP professionals cannot necessarily treat financial planning or robo software as a ‘black box’ where data goes in, and output comes out, without an understanding of the assumptions and machinations the software uses behind the scenes to come to its conclusions and recommendations. Which, notably, may put additional pressure on some software vendors in the coming years to explain more explicitly how, exactly, their recommendation engines work (so that CFP professionals can have the necessary understanding to comply with their Duty to understand their Technology).

Similarly, CFP professionals must also take steps to ensure that the output of the software is consistent with what it purports and is intended to analyze and recommend:
A CFP professional must have a reasonable basis for believing that the technology produces reliable, objective, and appropriate outcomes.

Again, CFP professionals are not necessarily required to deconstruct or fully audit their technology but must have some ‘reasonable basis’ that their technology produces reliable, objective, and appropriate outcomes. Potential approaches may include:

  • Input some ‘typical’ client scenarios and evaluate the output/outcomes to determine if they are as expected;
  • Compare the software output (e.g., as a user or via a demo) to output/results from other established software tools;
  • Evaluate the credibility of the software provider, its experience and team, and the expertise it hired or called upon to design the software; and
  • Examine any third-party expert or user reviews of the software for feedback.

Notably, CFP professionals are expected not only to evaluate the reliability and appropriateness of their software output, but also the objectivity of the output. Accordingly, CFP professionals should also inquire of their software companies whether they receive any material revenue outside of their User Fees for the software itself – an increasingly common approach as more financial planning and wealth management software companies use their software to facilitate the sale of investment or insurance/annuity products that could potentially compromise their objectivity.

Of course, as with CFP professionals themselves, the presence of a conflict of interest does not automatically mean that results/outcomes have been tainted; nonetheless, the “Technology Duties” of CFP professionals do at least impose on them an obligation to understand whether such conflicts of interest may be present with their technology providers, and if so to have a reasonable basis for believing that the software company is maintaining the objectivity of its output (i.e., what are the software company’s policies and procedures to mitigate its own conflict of interest?). And if the CFP professional’s evaluation of their software is that its results and recommendations would not be objective, the CFP professional has an obligation and Duty not to use the software.

15) NOT BORROWING FROM, LENDING TO, OR COMMINGLING FINANCIAL ASSETS WITH CLIENTS

For centuries and even millennia, it has been recognized that when one person is entrusted to care for the financial and business affairs of another, the trustee should not manage those assets in his/her own interests, but instead should manage those assets in the interests of their beneficial owner… which, over time, evolved into the fiduciary “best interests” Standard of today.

Notably, though, the idea of managing the financial affairs of the Client in the “best interests” of that Client isn’t necessarily or even primarily about finding the one ‘best’ solution for the Client. Instead, it’s about recognizing that the advisor has an obligation to manage affairs and make recommendations, not in a manner that benefits their own interests and their Client’s, but one that benefits only (i.e., is best for) their Client.

In other words, the origins of the “best interests” Standard are primarily about not self-dealing a clients’ financial assets and affairs for one’s own benefits. For instance, being responsible for client assets but using them for the advisor or trustee’s own business interests (i.e., borrowing money from a client, or lending a client’s money to the advisor or trustee) could potentially put the advisor’s interests at a crossroads against the Client’s, and therefore make it impossible for the advisor to continue to manage the clients’ assets in their own best interests.

For example, if the advisor’s business was failing after borrowing money from the Client, there would be an undue temptation to borrow more from the Client, rather than telling them to cut their losses at the risk of further impairing the advisor’s business interests. Similarly, if the advisor had loaned money to the Client, it would be difficult to give a recommendation to the Client to default, even if that was the most appropriate course of action.

Accordingly, one of the longest standing obligations of financial advisors and fiduciaries (and trustees in general) is not to borrow from, lend money to, or commingle financial assets with clients, due to the potentially untenable conflicts that such actions can create (rendering it impossible in adverse situations for the advisor to objectively provide recommendations to the Client).

In the context of the Duties that CFP professionals have to their clients, the CFP Board’s Standards of Conduct similarly stipulate that:

  1. A CFP professional may not, directly or indirectly, borrow money from or lend money to a Client unless:
    1. The Client is a member of the CFP professional’s Family; or
    2. The lender is a business organization or legal entity in the business of lending money.
    3. A CFP professional may not commingle a Client’s Financial Assets with the Financial Assets of the CFP professional or the CFP Professional’s Firm.

Notably, the CFP Board does provide an exception for financial advisors to borrow or lend money to family members who are clients, recognizing the practical realities that sometimes family members do borrow and lend within the family. (And in the cases of affluent families, may even be done intentionally as intra-family loans for estate planning purposes.)

However, outside of family members who are Clients, CFP professionals are strictly prohibited from borrowing money from or lending money to clients, unless that Client happens to be a business or entity otherwise already in the business of lending money (e.g., in the case of an advisor who manages a 401(k) plan for a bank that is a bona fide lending institution and then separately wants to take out a business loan from that bank).

On the other hand, when it comes to the commingling of assets with Clients, the CFP Board’s Standards of Conduct outright prohibit commingling in all scenarios. Which means in situations where even family members are Clients of the CFP professional or his/her firm, assets must be separated, potentially creating challenges in the case of the CFP professional managing a family trust in which he/she is also a beneficiary. (Though if the family trust didn’t compensate the CFP professional, ostensibly the trust would no longer be a “Client” and thus not run afoul of the rules.)

It’s also important to recognize that the prohibition against commingling the CFP professional’s Financial Assets (or their firm’s Financial Assets) with Clients would also limit the ability of advisors to co-invest their money alongside their clients in pooled vehicles (e.g., limited partnership or similar private investment structures).

In the end, the core requirement of CFP professionals – as with any professional – is to act in the best interests of their clients and adhere to the Standards of Conduct expected of any professional. Which can and do apply across all of the professional’s activities, from the advice they provide to clients to how they conduct their own business affairs. For which the CFP Board prescribes a series of 15 Duties Owed To Clients to guide CFP professionals on what it actually takes to meet their professional fiduciary obligation to clients.

In this context, the CFP Board’s Standards of Conduct are not meant to be an onerous series of new or different duties, and in practice are often ones that most professionals adhere to anyway if only for good business practices. Nonetheless, by establishing formal Standards of Conduct, the CFP Board also implicitly reserves the right to discipline CFP professionals who fail to adhere to the requirements… or in the extreme, to revoke the CFP marks altogether from those who fail to represent themselves properly as professionals!

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