Financial Planning—
Standards, Ethics and Liability
I. Richard Ploss, Esq. CPA, CFP©
Preti Flaherty Beliveau & Pachios, LLP
© 2013 All materials are proprietary.
Agenda
• PART I: What is Personal Financial Planning?
A working definition
• PART II: What are the key substantive components of
Personal Financial Planning?
• PART III: Alphabet Soup: Professional Designations &
Compensation Models
• PART IV: Standards and Ethics
• PART V: Issues and Applications
• PART VI: Conclusions & Questions (Time Permitting)
© 2013 All materials are proprietary.
2
PART I: What is Financial Planning
(A Working Definition)
Financial Planning can sometimes be defined as:
 The development and implementation of a coordinated
plan for the achievement of a client’s overall personal
financial objectives.
 A deliberate and continuing process by which a sufficient
amount of capital is accumulated ad conserved and
adequate levels of income are attained to accomplish the
financial and personal objectives of the client.
 Creating order out of chaos1.
1See
Leimberg, Stinsky, Doyle and Jackson, Tools & Techniques of
Financial Planning, (9th Edition National Underwriter 2009).
© 2013 All materials are proprietary.
3
What is Financial Planning (A Working Definition)
Theoretically, personal financial planning should be
viewed not as a service or product but as a process
which consists of the following individual activities:
1.Establish the relationship
2.Gather background information
3.Establish financial objectives
4.Identify and evaluate constraints to the objectives
5.Develop the financial plan
6.Execute/implement the financial plan
7.Monitor the plan (measure performance)
© 2013 All materials are proprietary.
4
PART II: The Substantive Components of Personal
Financial Planning
The personal financial planning process really embodies
the following disciplines:
 Cash flow planning and budgeting
 Risk management
 Investment planning
 Income tax planning
 Retirement planning
 Estate planning
© 2013 All materials are proprietary.
5
The Substantive Components of Personal Financial
Planning
Given the complexity of each discipline, a financial
planning team should consist of professionals from the
following disciplines:
 Banker
 Certified Public Accountant or Enrolled Agent
 Lawyer (preferably with an estate planning/tax
background)
 Insurance Professional
 Investment Professional
© 2013 All materials are proprietary.
6
The Substantive Components of Personal Financial
Planning
The “glue” that holds all of this together is the Personal
Financial Planner (who is the “quarterback” of the team)
 Qualifications:
Competence in all of the above disciplines (at a high
enough level to spot issues in each of the disciplines).
Ability to work well with allied professionals (such as
lawyers, insurance agents, etc.).
“Soft skills” to work well with clients and their families.
© 2013 All materials are proprietary.
7
The Substantive Components of Personal Financial
Planning
• Generally, most financial planners choose one of the
core “disciplines” listed previously (i.e., investment
planning) and bring in professionals from other
disciplines to complete the team.
© 2013 All materials are proprietary.
8
PART III: Professional Designations and
Compensation Models
• An Overview of Designations (Alphabet Soup)
– Certified Financial Planner™ or CFP® Designation
– Chartered Financial Consultant or ChFc Designation
– Certified Private Wealth Advisor® or CPWA®
Designation
– Chartered Financial Analyst or CFA Designation
– Registered Financial Planner or RFP Designation
– Personal Financial Services of PFS Designation
© 2013 All materials are proprietary.
9
Professional Designations and Compensation Models
Some Key Organizations in the Personal Financial
Planning Process:
 The CFP Board (CFP Board)
 The Financial Planning Association (FPA)
 The National Association of Personal Financial Advisors
(NAPFA)
 The American College
 The Investment Management Consultant’s Association
(IMCA)
 The CFA Institute
 The Financial Planning Standards Board (FPSB)
© 2013 All materials are proprietary.
10
Professional Designations and Compensation Models
Compensation Models
 Fee Only
 Commission Only
 Fee Based
© 2013 All materials are proprietary.
11
Professional Designations and Compensation Models
Fee Only vs. Fee Based Financial Planners
 Fee only planner = planner who derives his/her
compensation exclusively from fees paid directly to
him/her by clients.
 Fee based planner = planner who derives his/her
compensation from two sources:
Fees paid to him/her directly by the client
Commissions paid to him/her by a mutual fund company,
insurance company or investment partnership
© 2013 All materials are proprietary.
12
PART IV: Standards and Ethics
Standards
 Defining the client or prospective client relationship
 Information disclosed to prospective clients and clients
 Prospective client and client information and property
 Obligations to prospective clients and clients
© 2013 All materials are proprietary.
13
Standards and Ethics
Ethics–Seven Principles as Promulgated in the CFP
Board’s Code of Ethics
1.Integrity (provide professional services with integrity)
2.Objectivity (provide professional services objectively)
3.Competence (maintain the knowledge and skill
necessary to provide professional services competently)
4.Fairness (Be fair and reasonable in all professional
relationships. Disclose conflicts of interest.)
© 2013 All materials are proprietary.
14
Standards and Ethics
Ethics–Seven Principles…(cont.)
5.Confidentiality (protect the confidentiality of all client
information)
6.Professionalism (act in a manner that demonstrates
exemplary professional conduct)
7.Diligence (provide professional services diligently)
© 2013 All materials are proprietary.
15
Standards and Ethics
The Fiduciary Standard For Personal Financial Planners
 Historical perspective: Agent vs. Fiduciary
 The Fiduciary Standard as contained in CFP Board’s
Code of Ethics
A fiduciary is defined as “one who acts in utmost good
faith, in a manner he or she believes to be in the best
interest of the client.”
Rule 1.4 of the Code of Ethics…
© 2013 All materials are proprietary.
16
Standards and Ethics
The Financial Planning Coalition
In December 2008, the CFP Board, the FPA
and NAPFA entered into a strategic alliance to
pursue consumer protection and industry
reform.
© 2013 All materials are proprietary.
17
Standards and Ethics
The Financial Planning Coalition (cont.)
 The coalition’s objectives are to ensure that financial
planning services are delivered to the public with
fiduciary accountability and transparency, serving
the client’s best interest first and always2.
2It
should also be noted that as part of its objectives, the Coalition
supports the CFP® marks as being the marks of choice for
professionals who provide personal financial planning services.
© 2013 All materials are proprietary.
18
Standards and Ethics
The fiduciary standard as promulgated by the Financial
Planning Coalition clearly intends to challenge the
traditional agency relationship that has been the backbone
of the broker dealer relationship as espoused by many of
the traditional brokerage firms and insurance carriers.
© 2013 All materials are proprietary.
19
PART V: Issues and Applications
Issue #1: The Compensation Issue (Fee Only vs. Fee
Based)
 Historically, biggest issue
 What’s the difference?
 Informed decision?
 Proposed solution
© 2013 All materials are proprietary.
20
Issues and Applications
Issue #2: Fiduciary Standard vs. Broker Dealer Model in
Financial Planning
 Closely related to compensation issue
 Nearly all providers would state they act on behalf of
clients’ best interest
 Impact of compensation tied to product provider
© 2013 All materials are proprietary.
21
Issues and Applications
Example #1:…
 Which product does the Professional recommend?
 Does the Professional have an obligation to disclose to
the client the existence of Company B’s product?
 Does the Professional have an obligation to disclose
his/her affiliation to Company B and how he/she is being
compensated? (This actually ties back to the
compensation issue)
 Would the author’s “Full Disclosure” model described
above be sufficient to overcome this issue?
© 2013 All materials are proprietary.
22
Issues and Applications
Issue #3: The “One Stop Shop” Issues
 The “One Stop Shop” Model
Definition
© 2013 All materials are proprietary.
23
Issues and Applications
• What are the issues associated with the One Stop Shop
Model?
–Can the Planner still comply with the fiduciary
standard?
–Does this now put such pressure on the Planner
to use internal sources and product to fulfill the
client’s need such that we are now confronting
an agency issue and are now under a fee-based
model?
© 2013 All materials are proprietary.
24
Issues and Applications
• Issues with One Stop Shop Model (cont.)
– Does this now impose an additional obligation on the
Planner to now monitor the performance of any product
that may have been recommended by another
department of the institution–even if the product is no
longer being offered?
• Fee-based model
• Responsibility
• For how long?
© 2013 All materials are proprietary.
25
Issues and Applications
• Example #2:…
– Fee-only planner working for an institution that also
provides financial products
© 2013 All materials are proprietary.
26
PART VI: Conclusion
In the author’s opinion it is probably best that an
institution never enter into the One Stop Shop Model but
instead offer fee-only planning and focus on only one
core area of planning (such as investment management).
Otherwise the path to liability will remain open.
© 2013 All materials are proprietary.
27