Lecture 1 Financial Planning Profession: Practice Regulation and Ethics
Personal Financial Planning <ul><li>The process of formulating, implementing and monitoring multifunctional decisions that...
Benefits <ul><li>Efficient allocation of individual/family resources </li></ul><ul><li>Financial order & discipline   Mor...
Goals and risks <ul><li>Goals: </li></ul><ul><ul><li>Financial security </li></ul></ul><ul><ul><li>Child’s college </li></...
Financial Planner’s Pyramid of Knowledge Planner’s Professional Responsibility External  Analysis Establishing  Financial ...
Financial Planning Institutions <ul><li>Accounting Firms </li></ul><ul><li>Law Firms </li></ul><ul><li>Insurance Companies...
Financial Planning Designations <ul><li>Certified Financial Planner TM  (CFP TM ) </li></ul><ul><ul><li>CFP Board of Stand...
Other Designations held by Financial Services Professionals <ul><li>Chartered Life Underwriter (CLU) </li></ul><ul><ul><li...
Other Licenses held by Financial Service Professionals <ul><li>Attorney (JD) </li></ul><ul><li>Insurance Agent </li></ul><...
Compensation Methods <ul><li>Fee-only Planners </li></ul><ul><li>Fee-based Planners </li></ul><ul><li>Commission-based Pla...
Developing a Professional Practice <ul><li>Building a practice </li></ul><ul><ul><li>Find a niche </li></ul></ul><ul><ul><...
Ethics and Regulation
The CFP Board and the Ethics Code <ul><li>Certified Financial Planner Board of Professional Review  (BOPR) </li></ul><ul><...
The CFP Board and the Ethics Code <ul><li>CFP Board Designee – anyone who is certified to use the ‘CFP’ trademark or is se...
Seven Principles <ul><li>Integrity </li></ul><ul><li>Objectivity </li></ul><ul><li>Competence </li></ul><ul><li>Fairness <...
Principle 1:  Integrity <ul><li>Rule 101 of the Code prohibits the solicitation of clients through  “false or misleading c...
Principle 1:  Integrity <ul><li>Commingling of funds </li></ul><ul><ul><li>May commingle client funds; not CFP’s </li></ul...
Principle 2:  Objectivity <ul><li>Intellectual honesty & impartiality </li></ul><ul><li>Exercise reasonable and prudent pr...
Principle 2:  Objectivity <ul><li>Rule 201 states as follows:  </li></ul><ul><li>“ A CFP Board designee shall exercise rea...
Principle 3:  Competence <ul><li>Two areas of competence are  knowledge  and the  application of that knowledge . </li></u...
Principle 4:  Fairness <ul><li>The Code provides that a CFP Board designee  “shall perform professional services in a mann...
Principle 4:  Fairness, cont. <ul><li>Fair – putting client interests first </li></ul><ul><li>Conflict of interest ex: pla...
Principle 4:  Fairness, cont. <ul><li>Compensation shall be fair & reasonable </li></ul><ul><li>CFP employee shall perform...
Principle 5:  Confidentiality <ul><li>Rule 501 provides that a CFP Board designee is prohibited from revealing  “or use fo...
Principle 5:  Confidentiality <ul><li>Necessary  </li></ul><ul><ul><li>Establish brokerage acct, or other to carry out cli...
Principle 6:  Professionalism <ul><li>“ A CFP Board designee’s conduct in all matters shall reflect credit upon the profes...
Principle 7:  Diligence <ul><li>“ A CFP Board designee shall act diligently in providing professional services.” </li></ul...
Principle 7:  Diligence <ul><li>Make only suitable recommendations for client (similar to competence) </li></ul><ul><li>Ma...
Disciplinary Rules and Procedures <ul><li>“The Procedures” are the rules and regulations for disciplinary proceedings agai...
Burdens of Proof <ul><li>Preponderance of the evidence </li></ul><ul><ul><li>51% or better; more likely than not </li></ul...
Grounds and Forms of Discipline <ul><li>Grounds for discipline--any act which  violates the Code ,  fails to comply with t...
Grounds and Forms of Discipline   (cont’d) <ul><li>Forms of Discipline </li></ul><ul><ul><li>Private censure – unpublished...
The Practice Standards <ul><li>Establishes level of professional practice that is expected –  agreed upon norms of practic...
Step 1: Establish Client-Planner Relationship <ul><li>Explore with the prospective client his/her financial planning needs...
Step 1: Establish Client-Planner Relationship <ul><li>Explain the sources and methods of compensation for the services pro...
Step 2: Gather Client Data and Determine Goals & Expectations <ul><li>Obtain information necessary to formulate the financ...
Step 2: Gather Client Data and Determine Goals & Expectations <ul><li>Identify the client’s values, attitudes, and expecta...
Step 3: Determine the Client’s Financial Status Through Analysis and Evaluation <ul><li>Analyze and evaluate the client’s ...
Step 3: Determine the Client’s Financial Status Through Analysis and Evaluation <ul><li>Analyze and evaluate the client’s ...
Step 3: Determine the Client’s Financial Status Through Analysis and Evaluation <ul><li>Analyze and evaluate the client’s ...
Step 4: Develop and Present Financial Planning Recommendations <ul><li>Prepare appropriate alternative recommendations to ...
Step 4: Financial Planning Recommendations <ul><li>Provide documentation for recommendations where appropriate (e.g., pros...
Step 5: Implement the Financial Plan <ul><li>Create an implementation plan with an appropriate timeline </li></ul><ul><li>...
Step 6: Monitor the Financial Plan <ul><li>Monitor and evaluate effectiveness of recommendations </li></ul><ul><li>Review ...
CFP Designation <ul><li>Educational Requirements </li></ul><ul><li>Comprehensive Board Exam </li></ul><ul><li>Work experie...
Elements of a Comprehensive Financial Plan <ul><li>Personal Data </li></ul><ul><ul><li>Name, address, SS#, birth date, etc...
Elements of a Comprehensive Financial Plan <ul><li>Assumptions </li></ul><ul><ul><li>Inflation, growth, rates of return, m...
Elements of a Comprehensive Financial Plan <ul><li>Risk management/insurance </li></ul><ul><ul><li>Mortality; morbidity; l...
Elements of a Comprehensive Financial Plan <ul><li>Estate planning </li></ul><ul><ul><li>Control </li></ul></ul><ul><ul><l...
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Financial Planning Profession: Practice, Regulation

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Financial Planning Profession: Practice, Regulation

  1. 1. Lecture 1 Financial Planning Profession: Practice Regulation and Ethics
  2. 2. Personal Financial Planning <ul><li>The process of formulating, implementing and monitoring multifunctional decisions that enable a family to achieve financial goals and manage financial risk. </li></ul><ul><li>Both an ‘art’ and a ‘science’ </li></ul>
  3. 3. Benefits <ul><li>Efficient allocation of individual/family resources </li></ul><ul><li>Financial order & discipline  More likely to achieve goals </li></ul><ul><li>Helps establish rationality and feasibility </li></ul><ul><li>Better able to cope with and manage the fluctuations of the internal and external environments </li></ul>
  4. 4. Goals and risks <ul><li>Goals: </li></ul><ul><ul><li>Financial security </li></ul></ul><ul><ul><li>Child’s college </li></ul></ul><ul><ul><li>Retirement </li></ul></ul><ul><ul><li>Transfer of assets at death </li></ul></ul><ul><li>Risks: </li></ul><ul><ul><li>Disability </li></ul></ul><ul><ul><li>Ill health </li></ul></ul><ul><ul><li>Untimely death </li></ul></ul>
  5. 5. Financial Planner’s Pyramid of Knowledge Planner’s Professional Responsibility External Analysis Establishing Financial Direction Time Value of Money Data Collection Insurance Investments Tax Retirement Communication & Internal Analysis Estates Planning for Children’s Education  2002 Dalton Publications Financial and Analysis
  6. 6. Financial Planning Institutions <ul><li>Accounting Firms </li></ul><ul><li>Law Firms </li></ul><ul><li>Insurance Companies </li></ul><ul><li>PFP Firms </li></ul><ul><li>Investment Banks </li></ul><ul><li>Banks </li></ul><ul><li>Mutual Funds </li></ul>
  7. 7. Financial Planning Designations <ul><li>Certified Financial Planner TM (CFP TM ) </li></ul><ul><ul><li>CFP Board of Standards </li></ul></ul><ul><li>Chartered Financial Consultant (ChFC) </li></ul><ul><ul><li>The American College </li></ul></ul><ul><li>Personal Financial Specialist (PFS) </li></ul><ul><ul><li>AICPA </li></ul></ul>
  8. 8. Other Designations held by Financial Services Professionals <ul><li>Chartered Life Underwriter (CLU) </li></ul><ul><ul><li>The American College </li></ul></ul><ul><li>Chartered Financial Analyst (CFA) </li></ul><ul><ul><li>CFA Institute </li></ul></ul><ul><li>Certified Public Accountant (CPA) </li></ul><ul><ul><li>AICPA </li></ul></ul>
  9. 9. Other Licenses held by Financial Service Professionals <ul><li>Attorney (JD) </li></ul><ul><li>Insurance Agent </li></ul><ul><li>Securities Analyst </li></ul><ul><li>Registered Investment Adviser (RIA) </li></ul><ul><li>Real Estate Broker </li></ul>
  10. 10. Compensation Methods <ul><li>Fee-only Planners </li></ul><ul><li>Fee-based Planners </li></ul><ul><li>Commission-based Planners </li></ul><ul><li>Fees for Assets under Management </li></ul>
  11. 11. Developing a Professional Practice <ul><li>Building a practice </li></ul><ul><ul><li>Find a niche </li></ul></ul><ul><ul><li>Relationship intensive; trust </li></ul></ul><ul><li>Maintaining clients </li></ul><ul><ul><li>Listening to client needs </li></ul></ul><ul><li>Education and continuing education </li></ul>
  12. 12. Ethics and Regulation
  13. 13. The CFP Board and the Ethics Code <ul><li>Certified Financial Planner Board of Professional Review (BOPR) </li></ul><ul><ul><li>Interprets and applies the Code of Ethics and Professional Responsibility </li></ul></ul><ul><li>Certified Financial Planner Board of Governors – requires compliance with the ‘Code’ by those certified to use the ‘CFP’ mark and those seeking certification </li></ul>
  14. 14. The CFP Board and the Ethics Code <ul><li>CFP Board Designee – anyone who is certified to use the ‘CFP’ trademark or is seeking certification </li></ul><ul><li>Principles – general guidelines which apply to all designees (7) </li></ul><ul><li>Rules – more specific & apply to specific professional instances </li></ul>
  15. 15. Seven Principles <ul><li>Integrity </li></ul><ul><li>Objectivity </li></ul><ul><li>Competence </li></ul><ul><li>Fairness </li></ul><ul><li>Confidentiality </li></ul><ul><li>Professionalism </li></ul><ul><li>Diligence </li></ul>
  16. 16. Principle 1: Integrity <ul><li>Rule 101 of the Code prohibits the solicitation of clients through “false or misleading communications or advertisements.” </li></ul><ul><li>Creation of Unjustified expectations </li></ul><ul><li>Not representing CFP Board </li></ul><ul><li>Dishonesty, fraud, deceit prohibited </li></ul>
  17. 17. Principle 1: Integrity <ul><li>Commingling of funds </li></ul><ul><ul><li>May commingle client funds; not CFP’s </li></ul></ul><ul><li>Fiduciary relationship </li></ul><ul><ul><li>Higher standard of care when dealing with client assets/property </li></ul></ul>
  18. 18. Principle 2: Objectivity <ul><li>Intellectual honesty & impartiality </li></ul><ul><li>Exercise reasonable and prudent professional judgment </li></ul><ul><li>Objectivity focuses on interest of client ; integrity focuses on actions of CFP </li></ul><ul><li>Question: What is best for client? </li></ul>
  19. 19. Principle 2: Objectivity <ul><li>Rule 201 states as follows: </li></ul><ul><li>“ A CFP Board designee shall exercise reasonable and prudent professional judgment in providing professional services.” </li></ul><ul><li> What would a reasonable, prudent CFP Designee do in similar circumstances? </li></ul>
  20. 20. Principle 3: Competence <ul><li>Two areas of competence are knowledge and the application of that knowledge . </li></ul><ul><li>“ A CFP Board designee shall keep informed of developments in the field of financial planning and participate in continuing education throughout the designee’s professional career in order to improve professional competence in all areas in which the designee is engaged.” </li></ul><ul><li>Advise only in areas of competence; referrals </li></ul>
  21. 21. Principle 4: Fairness <ul><li>The Code provides that a CFP Board designee “shall perform professional services in a manner that is fair and reasonable to clients, principals, partners, and employers and shall disclose conflict(s) of interest(s) in providing such services.” </li></ul>
  22. 22. Principle 4: Fairness, cont. <ul><li>Fair – putting client interests first </li></ul><ul><li>Conflict of interest ex: planner receives commissions on products (AMEX) </li></ul><ul><ul><li>Incentive to sell annuities; life insurance products w/ highest commissions </li></ul></ul><ul><li>Disclosure of sources of compensation </li></ul>
  23. 23. Principle 4: Fairness, cont. <ul><li>Compensation shall be fair & reasonable </li></ul><ul><li>CFP employee shall perform in accordance with lawful objectives of employer & in accordance w/ Code </li></ul><ul><li>Duty of good faith to partners in firm – disclosure of relevant information </li></ul><ul><ul><li>Credentials, experience, licensing status,etc </li></ul></ul>
  24. 24. Principle 5: Confidentiality <ul><li>Rule 501 provides that a CFP Board designee is prohibited from revealing “or use for his or her own benefit—without the client’s consent, any personally identifiable information relating to the client relationship or the affairs of the client, except and to the extent disclosure or use is reasonably necessary.” </li></ul>
  25. 25. Principle 5: Confidentiality <ul><li>Necessary </li></ul><ul><ul><li>Establish brokerage acct, or other to carry out client engagement </li></ul></ul><ul><ul><li>To comply with legal requirements/process </li></ul></ul><ul><ul><li>To defend CFP designee against wrongdoing </li></ul></ul><ul><ul><li>Express or implied consent </li></ul></ul><ul><ul><li>Disclosure limited to scope of exception. </li></ul></ul><ul><ul><li>Harm to client not necessary. </li></ul></ul>
  26. 26. Principle 6: Professionalism <ul><li>“ A CFP Board designee’s conduct in all matters shall reflect credit upon the profession.” </li></ul><ul><li>CFP Board designees must “use the marks in compliance with the rules and regulations of the CFP Board.” </li></ul>
  27. 27. Principle 7: Diligence <ul><li>“ A CFP Board designee shall act diligently in providing professional services.” </li></ul><ul><li>Under Rule 701, a CFP Board designee “shall provide services diligently.” </li></ul>
  28. 28. Principle 7: Diligence <ul><li>Make only suitable recommendations for client (similar to competence) </li></ul><ul><li>Make reasonable investigations regarding financial products (may rely on other investigations) </li></ul><ul><li>Properly supervise subordinates & not accept/allow violations of code </li></ul>
  29. 29. Disciplinary Rules and Procedures <ul><li>“The Procedures” are the rules and regulations for disciplinary proceedings against CFP Board designees. </li></ul><ul><li>A standard of proof, or “burden of proof,” is the requirement of proving facts to a certain degree of probability. </li></ul>
  30. 30. Burdens of Proof <ul><li>Preponderance of the evidence </li></ul><ul><ul><li>51% or better; more likely than not </li></ul></ul><ul><li>Clear and convincing evidence </li></ul><ul><ul><li>75%; required for reinstatement </li></ul></ul><ul><li>Evidence beyond a reasonable doubt </li></ul><ul><ul><li>99% </li></ul></ul><ul><li>Burden is upon the CFP Board </li></ul>
  31. 31. Grounds and Forms of Discipline <ul><li>Grounds for discipline--any act which violates the Code , fails to comply with the Practice Standards , violates any criminal laws, whether the CFP Board designee is convicted or acquitted, is the proper basis for professional suspension, violates these Procedures or an order of discipline </li></ul><ul><li>Failure to respond to a request of the CFP Board without good cause, or obstruction of the CFP Board or staff in the performance of their duties </li></ul><ul><li>Any false or misleading statement made to the CFP Board </li></ul><ul><li>Other acts amounting to unprofessional conduct </li></ul>
  32. 32. Grounds and Forms of Discipline (cont’d) <ul><li>Forms of Discipline </li></ul><ul><ul><li>Private censure – unpublished, written reproach </li></ul></ul><ul><ul><li>Public letter of admonition </li></ul></ul><ul><ul><li>Suspension – up to five years </li></ul></ul><ul><ul><li>Revocation – permanent </li></ul></ul><ul><li>Board of Professional Review (BOPR) conducts investigations </li></ul><ul><li>Hearing Panel hears evidence </li></ul>
  33. 33. The Practice Standards <ul><li>Establishes level of professional practice that is expected – agreed upon norms of practice </li></ul><ul><ul><li>Facts of each situation determine services to be provided </li></ul></ul><ul><li>Financial Planning Process </li></ul><ul><ul><li>Six ‘Tasks’ </li></ul></ul>
  34. 34. Step 1: Establish Client-Planner Relationship <ul><li>Explore with the prospective client his/her financial planning needs and expectations, as well as the CFP professional’s suitability and desire to meet those needs and expectations </li></ul><ul><li>Discuss with the prospective client issues and concepts related to the overall financial planning process </li></ul><ul><li>Explain to the prospective client the scope of financial services offered by the CFP professional and his/her firm </li></ul>
  35. 35. Step 1: Establish Client-Planner Relationship <ul><li>Explain the sources and methods of compensation for the services provided </li></ul><ul><li>Provide to the prospective client disclosures as required by the CFP Board’s Code of Ethics and Professional Responsibility </li></ul><ul><li>Clarify the prospective client’s responsibilities and those of the CFP professional </li></ul><ul><li>Mutually define the scope of the engagement </li></ul><ul><li>Document the scope of the engagement </li></ul>
  36. 36. Step 2: Gather Client Data and Determine Goals & Expectations <ul><li>Obtain information necessary to formulate the financial plan (e.g., through client interviews; questionnaires) </li></ul><ul><li>Collect applicable client records and documents </li></ul><ul><li>Determine the client’s personal and financial goals, needs, and priorities with active client participation </li></ul><ul><li>Determine the client’s time horizon for each identified goal </li></ul>
  37. 37. Step 2: Gather Client Data and Determine Goals & Expectations <ul><li>Identify the client’s values, attitudes, and expectations that may impact the financial plan </li></ul><ul><li>Determine the client’s level of knowledge about financial matters </li></ul><ul><li>Determine the client’s risk tolerance level </li></ul>
  38. 38. Step 3: Determine the Client’s Financial Status Through Analysis and Evaluation <ul><li>Analyze and evaluate the client’s current financial situation, preparing projections when appropriate: </li></ul><ul><ul><li>Statement of financial position/balance sheet </li></ul></ul><ul><ul><li>Cash flow statement/budget </li></ul></ul><ul><ul><li>Debt (e.g., consumer, mortgage, investment, contingent liabilities) </li></ul></ul><ul><ul><li>Estate documents, strategies, and estate tax liabilities </li></ul></ul>
  39. 39. Step 3: Determine the Client’s Financial Status Through Analysis and Evaluation <ul><li>Analyze and evaluate the client’s current financial situation, preparing projections when appropriate: </li></ul><ul><ul><li>Education funding </li></ul></ul><ul><ul><li>Employee benefits </li></ul></ul><ul><ul><li>Special circumstances (e.g., divorce, disabilities, non-traditional families) </li></ul></ul><ul><ul><li>Income tax </li></ul></ul><ul><ul><li>Investments </li></ul></ul><ul><ul><li>Asset allocation </li></ul></ul>
  40. 40. Step 3: Determine the Client’s Financial Status Through Analysis and Evaluation <ul><li>Analyze and evaluate the client’s current financial situation, preparing projections when appropriate: </li></ul><ul><ul><li>Insurance coverage </li></ul></ul><ul><ul><li>Closely held business </li></ul></ul><ul><ul><li>Asset protection </li></ul></ul><ul><ul><li>Capital needs analysis </li></ul></ul>
  41. 41. Step 4: Develop and Present Financial Planning Recommendations <ul><li>Prepare appropriate alternative recommendations to meet the client’s goals and objectives </li></ul><ul><li>Conduct quantitative sensitivity analysis (e.g., changing assumptions such as inflation rate, rates of return, time horizon) </li></ul>
  42. 42. Step 4: Financial Planning Recommendations <ul><li>Provide documentation for recommendations where appropriate (e.g., prospectus, financial reports) </li></ul><ul><li>Present alternatives, recommendations, and review assumptions with the client </li></ul><ul><li>Obtain feedback from the client and revise the recommendations, as appropriate </li></ul><ul><li>Prioritize action items </li></ul><ul><li>Obtain client’s agreement </li></ul>
  43. 43. Step 5: Implement the Financial Plan <ul><li>Create an implementation plan with an appropriate timeline </li></ul><ul><li>Implement the recommendations </li></ul><ul><li>Coordinate as necessary with the client and/or other professionals </li></ul>
  44. 44. Step 6: Monitor the Financial Plan <ul><li>Monitor and evaluate effectiveness of recommendations </li></ul><ul><li>Review the performance and progress of the plan with the client </li></ul><ul><li>Discuss and evaluate changes in the client’s personal circumstances </li></ul><ul><li>Review and evaluate changes in the legal, tax, and economic environments </li></ul><ul><li>Make recommendations to accommodate changed circumstances </li></ul>
  45. 45. CFP Designation <ul><li>Educational Requirements </li></ul><ul><li>Comprehensive Board Exam </li></ul><ul><li>Work experience requirement </li></ul><ul><li>Agree to abide by Code of Ethics and Professional Responsibility </li></ul>
  46. 46. Elements of a Comprehensive Financial Plan <ul><li>Personal Data </li></ul><ul><ul><li>Name, address, SS#, birth date, etc. </li></ul></ul><ul><li>Goals and Objectives </li></ul><ul><ul><li>Basic foundation of plan </li></ul></ul><ul><ul><li>Specific and precise </li></ul></ul><ul><li>Identification of issues and problems </li></ul><ul><ul><li>Major illness, education, taxes, etc </li></ul></ul>
  47. 47. Elements of a Comprehensive Financial Plan <ul><li>Assumptions </li></ul><ul><ul><li>Inflation, growth, rates of return, mortality </li></ul></ul><ul><li>Balance Sheet/Net worth </li></ul><ul><ul><li>Itemized as appropriate </li></ul></ul><ul><li>Cash flow management </li></ul><ul><ul><li>Sources and uses of cash </li></ul></ul><ul><li>Income tax </li></ul><ul><ul><li>Projections as necessary </li></ul></ul>
  48. 48. Elements of a Comprehensive Financial Plan <ul><li>Risk management/insurance </li></ul><ul><ul><li>Mortality; morbidity; liability; property; business </li></ul></ul><ul><ul><li>Listing of existing policies and coverages </li></ul></ul><ul><li>Investments </li></ul><ul><ul><li>Risk tolerance; risk management; suitability; liquidity; diversification </li></ul></ul><ul><li>Financial independence </li></ul><ul><ul><li>Special treatment as necessary </li></ul></ul>
  49. 49. Elements of a Comprehensive Financial Plan <ul><li>Estate planning </li></ul><ul><ul><li>Control </li></ul></ul><ul><ul><li>Disposition </li></ul></ul><ul><ul><li>Taxation </li></ul></ul><ul><li>Recommendations </li></ul><ul><ul><li>Written </li></ul></ul><ul><li>Implementation plan </li></ul><ul><ul><li>Schedule reflecting responsibilities and timing </li></ul></ul>
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