GENERAL FINANCIAL PLANNING PRINCIPLES. Textbook

Transcription

1 GENERAL FINANCIAL PLANNING PRINCIPLES Textbook 2016 Published by: KEIR EDUCATIONAL RESOURCES 4785 Emerald Way Middletown, OH FAX

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3 TABLE OF CONTENTS Title Page Professional Conduct and Regulation (Topics 1-7) Topic 1: CFP Board s Code of Ethics and Professional Responsibility and Rules of Conduct Topic 2: CFP Board s Financial Planning Practice Standards Topic 3: CFP Board s Disciplinary Rules and Procedures Topic 4: Function, Purpose, and Regulation of Financial Institutions Topic 5: Financial Services Regulations and Requirements Topic 6: Consumer Protection Laws Topic 7: Fiduciary General Financial Planning Principles (Topics 8-16) Topic 8: Financial Planning Process Topic 9: Financial Statements Topic 10: Cash Flow Management Topic 11: Financing Strategies Topic 12: Economic Concepts Topic 13: Time Value of Money Concepts and Calculations Topic 14: Client and Planner Attitudes, Values, Biases, and Behavioral Finance Topic 15: Principles of Communication and Counseling Topic 16: Debt Management Education Planning (Topics 17-21) Topic 17: Education Needs Analysis Topic 18: Education Savings Vehicles Topic 19: Financial Aid Topic 20: Gift/Income Tax Strategies Topic 21: Education Financing Appendix A Cases Candebat Case Appendix A-1 Carlisle Case Appendix A-7 Sparks Case Appendix A-10 Beals Case Appendix A-16 Mocsin Case Appendix A Keir Educational Resources

4 Boris Case Appendix A-33 McKenzie Case Appendix A-44 Rotini Case Appendix A-54 Alexander Case Appendix A-65 Sagan Case Appendix A-85 Chose Case Appendix A-106 Dawson Case Appendix A-115 Ryan Case Appendix A-135 Appendix B CFP Board s Job Task Domains Appendix B-1 Appendix C CFP Board Sample documents Appendix C-1 Appendix D Sample documents checklist Appendix D-1 Appendix E Typical information found on data survey form Appendix E-1 and purpose and use of the information Appendix F Sample letter of instruction for Appendix F-1 disability and death Appendix G Loan amortization for 30-year mortgage Appendix G-1 Appendix H EFT formula guide Appendix H-1 Appendix I Selected facts and figures, Formula sheet, Appendix I-1 Provided tax tables, and 72 Topics List Glossary Glossary 1 Index Index Keir Educational Resources 1.2

5 PROFESSIONAL CONDUCT AND REGULATION CFP Board s Code of Ethics and Professional Responsibility and Rules of Conduct (Topic 1) CFP Board Student-Centered Learning Objectives (a) Explain the Fitness Standards for Candidates and Registrants, as revised January (b) Explain the seven principles of the Code of Ethics and Professional Responsibility, which are ethical and professional ideals of CFP professionals. (c) Apply the Rules of Conduct as they relate to being a CFP professional. CFP Board s Code of Ethics and Professional Responsibility and Rules of Conduct A. Standards of Professional Conduct B. Fitness Standards for Candidates and Registrants C. Code of Ethics and Professional Responsibility Principles a. Principle 1 Integrity b. Principle 2 Objectivity c. Principle 3 Competence d. Principle 4 Fairness e. Principle 5 Confidentiality f. Principle 6 Professionalism g. Principle 7 Diligence Rules of Conduct D. Fiduciary standard E. Disclosing compensation Keir Educational Resources

6 K Study Tip While reading Topics 1 and 2, keep the following in mind: 1. Be able to define financial planning, the financial planning process, and financial planning subject areas. 2. Understand the material elements of financial planning. 3. Recognize when a CFP professional is providing financial planning or material elements of financial planning and when they are not. There may be very subtle differences in the rules for each. 4. Know the required elements of a written agreement when financial planning services are provided. 5. Distinguish disclosure requirements and apply disclosure requirements appropriately in practice. 6. Discern the elements of the fiduciary standard and know when it applies. STANDARDS OF PROFESSIONAL CONDUCT The mission of the CFP Board of Standards, Inc. is to benefit the public by granting the CFP certification and upholding it as the recognized standard of excellence for competent and ethical personal financial planning. In order to ensure competency and high ethical standards among CFP certificants, CFP Board has set forth the Standards of Professional Conduct to serve as a comprehensive guide to certificants. There are five sections of the Standards of Professional Conduct: Code of Ethics and Professional Responsibility Rules of Conduct Financial Planning Practice Standards Disciplinary Rules and Procedures Candidate Fitness Standards Each of these 5 sections will be discussed in Topics 1 3 of this text Keir Educational Resources 1.4

7 Who Do The Standards Apply To? Applies to: Code of Ethics All who have been authorized to use the marks (certificants and registrants), and candidates Rules of Conduct All who have been authorized to use the CFP marks (certificants and registrants) Practice Standards Certificants who engage in personal financial planning (aka Practitioners) Fitness Standards (what Candidates and registrants might bar you from being permitted to use the CFP marks) Disciplinary Rules and Certificants, Registrants, Procedures Candidates Certificant = authorized to use the CFP marks and actively using them. Registrant = was authorized to use the CFP marks in the past but is not currently using them (and is still eligible to re-activate). Candidate = has applied but not yet met all of the requirements (e.g. did not pass the exam yet). FITNESS STANDARDS FOR CANDIDATES AND REGISTRANTS The following are the current Fitness Standards for Candidates and Registrants posted on the CFP Board s web site. Fitness Standards for Candidates and Registrants CFP Board established specific character and fitness standards for candidates for CFP certification to ensure that an individual s prior conduct would not reflect adversely upon the profession or the CFP certification marks. CFP Board determined that such standards would also provide notice to individuals interested in attaining CFP certification that certain conduct would bar certification, or require an individual to petition 2016 Keir Educational Resources

8 the Disciplinary and Ethics Commission (DEC) for consideration. Effective January 1, 2011, the Fitness Standards shall apply to Registrants, i.e., individuals who are not currently certified but have been certified by CFP Board in the past and are eligible to reinstate their certification without being required to pass the current CFP Certification Examination. Conduct Deemed Unacceptable The following conduct is unacceptable and will always bar an individual from becoming certified: Felony conviction for theft, embezzlement or other financially-based crimes. Felony conviction for tax fraud or other tax-related crimes. Revocation of a financial (e.g., registered securities representative, broker/dealer, insurance, accountant, investment advisor, financial planner) professional license, unless the revocation is administrative in nature, i.e., the result of the individual determining not to renew the license by not paying the required fees. Felony conviction for any degree of murder or rape. Felony conviction for any other violent crime within the last five years. Conduct Deemed a Presumptive Bar The following conduct is presumed to be unacceptable and will bar an individual from becoming certified unless the individual petitions the DEC for consideration, and the DEC grants the petition: Two or more personal bankruptcies. Revocation or suspension of a nonfinancial professional (e.g., real estate, attorney) license, unless the revocation is administrative in nature, i.e., the result of the individual determining not to renew the license by not paying the required fees. Suspension of a financial professional (e.g., registered securities representative, 2016 Keir Educational Resources 1.6

9 broker/dealer, insurance, accountant, investment advisor, financial planner) license, unless the suspension is administrative in nature, i.e., the result of the individual determining not to renew the license by not paying the required fees. Felony conviction for non-violent crimes (including perjury) within the last five years. Felony conviction for violent crimes other than murder or rape that occurred more than five years ago. Other matters that may reflect adversely upon the profession or the CFP certification marks will be reviewed by the DEC under the procedures outlined in CFP Board s Disciplinary Rules and Procedures, after the candidate or registrant has successfully completed the education, examination and experience requirements for certification. These include, but are not limited to, customer complaints, arbitrations and other civil proceedings, felony convictions for non-violent crimes that occurred more than five years ago, misdemeanor convictions, and employer investigations and terminations. CFP Board requires candidates for CFP certification and registrants seeking reinstatement to disclose certain matters on the ethics declaration of the Certification Application. PETITIONS FOR CONSIDERATION Individuals who have conduct that either falls under the Presumptive Bar list (see above) or may reflect adversely upon the profession or the CFP certification marks may petition the DEC for consideration and a determination whether their conduct will bar certification. The process for these reviews is as follows: 1. When CFP Board learns that an individual s conduct falls within the Unacceptable list (see above), CFP Board shall notify the individual that he/she is permanently barred from becoming certified Keir Educational Resources

10 2. The individual submits a written petition for consideration to CFP Board s Professional Standards Department, and signs a form agreeing to CFP Board s jurisdiction to review the matter. 3. CFP Board reviews the request to confirm that the conduct either falls within the Presumptive Bar list, or is conduct that may reflect adversely upon the profession or the CFP certification marks. Once confirmed, CFP Board will request all relevant documentation from the individual, and a fee shall be paid by the individual submitting the petition for consideration. Following the DEC s review of the petition, the DEC shall make one of the following determinations: Grant the petition after determining the conduct does not reflect adversely on the individual s fitness as either a registrant seeking reinstatement or as a candidate for CFP certification, or upon the profession or the CFP certification marks, and CFP certification shall be issued to the individual. Deny the petition but allow the individual to re-apply for CFP certification after a period not to exceed five years. The individual shall be required to satisfy the education, examination, experience and ethics requirements of CFP certification at the time of re-application. Deny the petition after determining the conduct reflects adversely on the individual s fitness as a registrant seeking reinstatement or as a candidate for CFP certification, or upon the profession or the CFP certification marks, and the CFP certification shall be permanently barred Keir Educational Resources 1.8

11 The DEC s decision regarding a petition for consideration may be appealed to the Appeals Committee of the Board of Directors, in accordance with Article 11 of the Disciplinary Rules and Procedures. Registrants applying for reinstatement following a period of suspension must follow the reinstatement procedures outlined in Article 15 of the Disciplinary Rules and Procedures. Editor s Note: Effective July 1, 2012 candidate and certificant bankruptcies shall be treated as follows: A single bankruptcy (with no other conduct issues) within the last five years will no longer be a presumptive bar, allowing the candidate to be approved for registration without petition to the DEC. Multiple-conduct cases (e.g., a single bankruptcy plus one or more other conduct violations) and cases of 2 or more personal or business bankruptcies will continue to be investigated and referred to the DEC for hearing. All bankruptcies will be publicly posted on the CFP Board website for a period of 10 years from the date of notification to CFP Board. Practice Question A candidate for CFP certification has a felony conviction for tax fraud. Which of the following is true? A. The individual is permanently barred from certification. B. The individual is barred from certification or five years. C. The individual may appeal the decision to the DEC. D. The individual may appeal the decision to the DEC after 5 years. Answer: Conviction of a felony for tax fraud, theft, embezzlement or other financiallybased crime, or conviction of any degree of murder is conduct deemed unacceptable and will always bar an individual from certification. Other felonies have a five year look back. DEC appeals are reserved for conduct presumed unacceptable. The answer is A Keir Educational Resources

12 CODE OF ETHICS AND PROFESSIONAL RESPONSIBILITY The Code of Ethics and Professional Responsibility of the CFP Board of Standards is applicable to all CFP certificants, as well as to all CFP candidates who are registered as such with the Board. The Code consists of seven broad, aspirational Principles, requiring: Integrity Objectivity Competence Fairness Confidentiality Professionalism Diligence Each of these Principles is backed by a more specific set of Rules of Conduct. The following pages include these Principles and Rules in the current form released by the CFP Board (effective July 1, 2008 and enforced as of January 1, 2009). Rather than paraphrasing the information about the Principles and Rules, we have included the actual language below Keir Educational Resources

13 CODE OF ETHICS AND PROFESSIONAL RESPONSIBILITY Principle 1 Integrity Provide professional services with integrity. Integrity demands honesty and candor which must not be subordinated to personal gain and advantage. Certificants are placed in positions of trust by clients, and the ultimate source of that trust is the certificant s personal integrity. Allowance can be made for innocent error and legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of one s principles. Principle 2 Objectivity Provide professional services objectively. Objectivity requires intellectual honesty and impartiality. Regardless of the particular service rendered or the capacity in which a certificant functions, certificants should protect the integrity of their work, maintain objectivity and avoid subordination of their judgment. Principle 3 Competence Maintain the knowledge and skill necessary to provide professional services competently. Competence means attaining and maintaining an adequate level of knowledge and skill, and application of that knowledge and skill in providing services to clients. Competence also includes the wisdom to recognize the limitations of that knowledge and when consultation with other professionals is appropriate or referral to other professionals necessary. Certificants make a continuing commitment to learning and professional improvement. Principle 4 Fairness Be fair and reasonable in all professional relationships. Disclose conflicts of interest. Fairness requires impartiality, intellectual honesty and disclosure of material conflicts of interest. It involves a subordination of one s own feelings, prejudices and desires so as to achieve a proper balance of conflicting interests. Fairness is treating others in the same fashion that you would want to be treated Keir Educational Resources

14 Principle 5 Confidentiality Protect the confidentiality of all client information. Confidentiality means ensuring that information is accessible only to those authorized to have access. A relationship of trust and confidence with the client can only be built upon the understanding that the client s information will remain confidential. Principle 6 Professionalism Act in a manner that demonstrates exemplary professional conduct. Professionalism requires behaving with dignity and courtesy to clients, fellow professionals, and others in business-related activities. Certificants cooperate with fellow certificants to enhance and maintain the profession s public image and improve the quality of services. Principle 7 Diligence Provide professional services diligently. Diligence is the provision of services in a reasonably prompt and thorough manner, including the proper planning for, and supervision of, the rendering of professional services. RULES OF CONDUCT The Rules of Conduct establish the high standards expected of certificants and describe the level of professionalism required of certificants. The Rules of Conduct are binding on all certificants, regardless of their title, position, type of employment or method of compensation, and they govern all those who have the right to use the CFP marks, whether or not those marks are actually used. The universe of activities engaged in by a certificant is diverse, and a certificant may perform all, some, or none of the typical services provided by financial planning professionals. Some rules may not be applicable to a certificant s specific activity. As a result, when considering the Rules of Conduct, the certificant must determine whether a specific rule is applicable to those services. A certificant will be deemed to be in compliance with these rules if that certificant can demonstrate that his or her employer completed the required action. Violations of the Rules of Conduct may subject a certificant or registrant to discipline. Because The CFP Board is a certifying and standards setting body for those individuals who have met and continue to meet The CFP Board s initial and ongoing certification requirements, discipline extends to the rights of registrants and certificants to use the CFP marks. Thus, the Rules are not designed to be a basis for legal liability to any third party Keir Educational Resources

15 1. Defining the Relationship with the Prospective Client or Client 1.1 The certificant and the prospective client or client shall mutually agree upon the services to be provided by the certificant. 1.2 If the certificant s services include financial planning or material elements of the financial planning process, prior to entering into an agreement, the certificant shall provide written information and/or discuss with the prospective client or client the following: a. The obligations and responsibilities of each party under the agreement with respect to: i. Defining goals, needs and objectives, ii Gathering and providing appropriate data, iii. Examining the result of the current course of action without changes, iv. The formulation of any recommended actions, v. Implementation responsibilities, and vi. Monitoring responsibilities. b. Compensation that any party to the agreement or any legal affiliate to a party to the agreement will or could receive under the terms of the agreement; and factors or terms that determine costs, how decisions benefit the certificant and the relative benefit to the certificant. c. Terms under which the agreement permits the certificant to offer proprietary products. d. Terms under which the certificant will use other entities to meet any of the agreement s obligations. If the certificant provides the above information in writing, the certificant shall encourage the prospective client or client to review the information and offer to answer any questions that the prospective client or client may have. 1.3 If the services include financial planning or material elements of the financial planning process, the certificant or the certificant s employer shall enter into a written agreement governing the financial planning services ( Agreement ). The Agreement shall specify: a. The parties to the Agreement, b. The date of the Agreement and its duration, c. How and on what terms each party can terminate the Agreement, and d. The services to be provided as part of the Agreement. The Agreement may consist of multiple written documents. Written documentation that includes the elements above and is used by a certificant or certificant s employer in compliance with state and/or federal law, or the 2016 Keir Educational Resources

16 rules or regulations of any applicable self-regulatory organization, such as a Form ADV or other disclosure, shall satisfy the requirements of this Rule. 1.4 A certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of the financial planning process, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board. 2. Information Disclosed To Prospective Clients and Clients 2.1 A certificant shall not communicate, directly or indirectly, to clients or prospective clients any false or misleading information directly or indirectly related to the certificant s professional qualifications or services. A certificant shall not mislead any parties about the potential benefits of the certificant s service. A certificant shall not fail to disclose or otherwise omit facts where that disclosure is necessary to avoid misleading clients. 2.2 A certificant shall disclose to a prospective client or client the following information: a. An accurate and understandable description of the compensation arrangements being offered. This description must include: i. Information related to costs and compensation to the certificant and/or the certificant s employer, and ii. Terms under which the certificant and/or the certificant s employer may receive any other sources of compensation, and if so, what the sources of these payments are and on what they are based. b. A general summary of likely conflicts of interest between the client and the certificant, the certificant s employer or any affiliates or third parties, including, but not limited to, information about any familial, contractual or agency relationship of the certificant or the certificant s employer that has a potential to materially affect the relationship. c. Any information about the certificant or the certificant s employer that could reasonably be expected to materially affect the client s decision to engage the certificant that the client might reasonably want to know in establishing the scope and nature of the relationship, including but not limited to information about the certificant s areas of expertise. d. Contact information for the certificant and, if applicable, the certificant s employer. e. If the services include financial planning or material elements of the financial planning process, these disclosures must be in writing. The written disclosures may consist of multiple written documents. Written disclosures used by a certificant or certificant s employer that includes the elements listed above, and are used in compliance with state or federal laws, or the rules or requirements of any applicable self Keir Educational Resources

17 regulatory organization, such as a Form ADV or other disclosure documents, shall satisfy the requirements of this Rule. The certificant shall timely disclose to the client any material changes to the above information. 3. Prospective Client and Client Information and Property 3.1 A certificant shall treat information as confidential except as required in response to proper legal process; as necessitated by obligations to a certificant s employer or partners; to defend against charges of wrongdoing; in connection with a civil dispute; or as needed to perform the services. 3.2 A certificant shall take prudent steps to protect the security of information and property, including the security of stored information, whether physically or electronically, that is within the certificant s control. 3.3 A certificant shall obtain the information necessary to fulfill his or her obligations. If a certificant cannot obtain the necessary information, the certificant shall inform the prospective client or client of any and all material deficiencies. 3.4 A certificant shall clearly identify the assets, if any, over which the certificant will take custody, exercise investment discretion, or exercise supervision. 3.5 A certificant shall identify and keep complete records of all funds or other property of a client in the custody, or under the discretionary authority, of the certificant. 3.6 A certificant shall not borrow money from a client. Exceptions to this Rule include: a. The client is a member of the certificant s immediate family, or b. The client is an institution in the business of lending money and the borrowing is unrelated to the professional services performed by the certificant. 3.7 A certificant shall not lend money to a client. Exceptions to this Rule include: a. The client is a member of the certificant s immediate family, or b. The certificant is an employee of an institution in the business of lending money and the money lent is that of the institution, not the certificant Keir Educational Resources

18 3.8 A certificant shall not commingle a client s property with the property of the certificant or the certificant s employer, unless the commingling is permitted by law or is explicitly authorized and defined in a written agreement between the parties. 3.9 A certificant shall not commingle a client s property with other clients property unless the commingling is permitted by law or the certificant has both explicit written authorization to do so from each client involved and sufficient record-keeping to track each client s assets accurately A certificant shall return a client s property to the client upon request as soon as practicable or consistent with a time frame specified in an agreement with the client. 4. Obligations to Prospective Clients and Clients 4.1 A certificant shall treat prospective clients and clients fairly and provide professional services with integrity and objectivity. 4.2 A certificant shall offer advice only in those areas in which he or she is competent to do so and shall maintain competence in all areas in which he or she is engaged to provide professional services. 4.3 A certificant shall be in compliance with applicable regulatory requirements governing professional services provided to the client. 4.4 A certificant shall exercise reasonable and prudent professional judgment in providing professional services to clients. 4.5 In addition to the requirements of Rule 1.4, a certificant shall make and/or implement only recommendations that are suitable for the client. 4.6 A certificant shall provide reasonable and prudent professional supervision or direction to any subordinate or third party to whom the certificant assigns responsibility for any client services. 4.7 A certificant shall advise his or her current clients of any certification suspension or revocation he or she receives from CFP Board. 5. Obligations To Employers 5.1 A certificant who is an employee/agent shall perform professional services with dedication to the lawful objectives of the employer/principal and in accordance with CFP Board s Code of Ethics. 5.2 A certificant who is an employee/agent shall advise his or her current employer/principal of any certification suspension or revocation he or she receives from CFP Board Keir Educational Resources

19 6. Obligations To CFP Board 6.1 A certificant shall abide by the terms of all agreements with CFP Board, including, but not limited to, using the CFP marks properly and cooperating fully with CFP Board s trademark and professional review operations and requirements. 6.2 A certificant shall meet all CFP Board requirements, including continuing education requirements, to retain the right to use the CFP marks. 6.3 A certificant shall notify CFP Board of changes to contact information, including, but not limited to, address, telephone number(s) and physical address, within forty five (45) days. 6.4 A certificant shall notify CFP Board in writing of any conviction of a crime, except misdemeanor traffic offenses or traffic ordinance violations unless such offense involves the use of alcohol or drugs, or of any professional suspension or bar within ten (10) calendar days after the date on which the certificant is notified of the conviction, suspension or bar. [Keir Editor s Note: Effective June 1, 2012 rule 6.4 has been amended to extend the deadline for reporting criminal convictions and professional discipline from 10 calendar days to 30 calendar days.] 6.5 A certificant shall not engage in conduct which reflects adversely on his or her integrity or fitness as a certificant, upon the CFP marks, or upon the profession. REMEMBER: IN DETERMINING WHETHER A CFP CERTIFICANT IS PRACTICING FINANCIAL PLANNING OR THE MATERIAL ELEMENTS OF FINANICAL PLANNING, CFP BOARD LOOKS AT 4 FACTORS: (1) THE CLIENT S UNDERSTANDING AND INTENT, (2) COMPREHENSIVENESS OF DATA GATHERING, (3) BREADTH AND DEPTH OF RECOMMENDATIONS, AND (4) DEGREE TO WHICH MULTIPLE SUBJECT AREAS ARE INVOLVED Keir Educational Resources

20 Practice Question Amy is a CFP certificant who has a good reputation regarding life insurance sales. She often gets referrals from local estate planning attorneys when they are recommending an ILIT as part of their client s estate plan. Amy goes through a fact-finding process with the clients in order to determine the best type of policy for the ILIT. When Amy is acting in this capacity she is: (1) Practicing financial planning because she is a CFP certificant and as such all of her clients are financial planning clients. (2) Practicing the material elements of financial planning based on the fact that she is gathering substantial amounts of data from the client. (3) Not practicing financial planning because the client s perception is that the attorney is doing the planning, the fact-finding is limited to that which is needed for making an insurance recommendation, and the breadth of her recommendation is limited to just life insurance. A. None of the above B. (1) only C. (1) and (2) only D. (3) only Answer: To answer this question, we need to review the four factors that CFP Board considers in determining whether a CFP certificant is practicing financial planning or the material elements of financial planning. Amy is clearly not viewed by clients as the one doing their planning, nor is she doing extensive factfinding regarding a wide range of financial needs. She is also limiting her recommendations to just life insurance. Note that any ONE of the four factors could cause a CFP certificant to be practicing financial planning; it does not require all four. D is the answer. REMEMBER: IF THE CFP CERTIFICANT IS PRACTICING FINANCIAL PLANNING OR THE MATERIAL ELEMENTS OF FINANCIAL PLANNING, HE OR SHE MUST ENTER INTO A WRITTEN AGREEMENT TO PROVIDE FINANCIAL PLANNING SERVICES. THE CFP CERTIFICANT MUST ALSO PROVIDE IN WRITING ANY CONFLICTS OF INTEREST AND HOW THE CFP CERTIFICANT WILL BE COMPENSATED. PRIOR TO ENTERING INTO THE WRITTEN AGREEMENT THESE TWO ITEMS CAN BE PROVIDED IN WRITING OR DISCUSSED ORALLY. (RULES 1.2, 1.3, AND 2.2) 2016 Keir Educational Resources

21 Practice Question If accurate records are kept of investments and the clients give written permission, in which of the following circumstances can a CFP certificant commingle funds for investment? (1) A client s funds can be commingled with other clients funds. (2) A client s funds can be commingled with the CFP certificant s firm s investment funds. (3) A client s funds can be commingled with the CFP certificant s personal funds. A. None of the above B. (1) only C. (1) and (2) only D. (1), (2), and (3) Answer: Generally, a client s funds should never be commingled. However, if the CFP certificant keeps accurate records and the clients give written permission, the assets may be commingled. See Rules of Conduct 3.8 and 3.9. D is the answer. REMEMBER: GENERALLY, COMMINGLING CLIENT FUNDS WITH OTHER CLIENT FUNDS, WITH THE CFP CERTIFICANT S FUNDS, OR WITH THE FIRM S FUNDS IS NOT PERMITTED. HOWEVER, COMMINGLING IS PERMITTED IF THE CLIENTS GIVE WRITTEN AUTHORIZATION AND THE CERTIFICANT KEEPS ACCURATE RECORDS. Practice Question Under what circumstances can a CFP certificant disclose a client s confidential information? A. Under no circumstances B. When the client has given oral authorization C. When the information will benefit the CFP certificant and not harm the client D. When the client is engaged in wrongdoing Answer: A CFP certificant can make disclosures when the client consents, even if the consent is given orally. In the absence of consent, disclosure is not permitted for 2016 Keir Educational Resources

22 the benefit of the CFP certificant, even if the client will not be harmed. Client wrongdoing is not, in itself, a sufficient reason for a CFP certificant to disclose confidential client information. See Rules of Conduct 3.1. B is the answer Keir Educational Resources

23 APPLICATION QUESTIONS 1. (Published question released January, 1999; updated) A local businessperson approaches a CFP certificant for assistance with an investment-related tax problem. The client s previous tax preparer had suggested the purchase of a variety of tax-advantaged investments to reduce the client s current and future tax burden. Time passed, the client s income dropped, and the tax laws changed. The client does not feel that the tax preparer misrepresented the situation on the initial sale, but he or she would still like to know what recourse is available with respect to the tax preparer. The CFP certificant should: (1) Explain to the inquirer that this issue is beyond the scope of the CFP certificant s professional expertise. (2) Advise the inquirer that no recourse is available. (3) Advise the inquirer to contact an attorney. (4) Contact the tax preparer. A. (4) only B. (1) and (3) only C. (2) and (4) only D. (1), (2), and (3) only 2. (Published question released January, 1999; updated) A CERTIFIED FINANCIAL PLANNER TM certificant obtains a new client. During the fact-finding process, the CFP certificant discovers that the client s previous adviser, also a CFP certificant, had filed several tax forms incorrectly, with computational errors. The CFP certificant s initial duty to the client should be which of the following? A. Contacting the other financial planner B. Contacting the CFP Board C. Contacting the IRS D. Informing the client of the situation 2016 Keir Educational Resources

24 Professional Conduct and Regulation Application Questions Topic 1 3. George Thomas, a CFP practitioner, reviewed the federal income tax returns brought to him by a new client and discovered a computation error made by the CFP practitioner who prepared the returns. The error means that the client has underpaid his income tax. Who should George Thomas notify about this error? (1) The IRS (2) The CFP practitioner who prepared the return (3) The CFP Board (4) The client A. (2) and (3) only B. (2) only C. (4) only D. (3) and (4) only E. (1), (2), (3), and (4) 4. Ruth Boris, a CFP practitioner, discovered that another financial planner in her office, who is not a CFP practitioner or candidate, had taken money from a client s account and then returned it six months later. To whom should Ruth report this information? A. No one, reporting is unnecessary because the money was returned B. The local authorities, because a crime has occurred C. The client, because it is up to the client to decide on what action to take. D. The other financial planner, because it is up to the other planner to report the action 5. A CFP certificant may, without the client s consent, reveal confidential information about the client for which of the following purposes? (1) To defend the CFP certificant against a charge of wrongdoing brought by the client (2) To comply with a court order to disclose the information (3) To keep the client s CPA up-to-date on information that the CFP certificant has learned A. (1) only B. (1) and (2) only C. (2) and (3) only D. (1), (2), and (3) 2016 Keir Educational Resources

25 Professional Conduct and Regulation Application Questions Topic 1 For practice answering case questions related to Topic 1, please answer the following questions in the cases included in Appendix A at the back of this textbook. Case Questions Candebat Carlisle Sparks Beals Mocsin Boris McKenzie Rotini Alexander 1 Sagan 1 and 2 Chester and Dina Chose Brad and Lauren Dawson Stuart and Patricia Ryan 1, 2, 3, 4, and Keir Educational Resources

26 Professional Conduct and Regulation Application Questions Topic 1 ANSWERS AND EXPLANATIONS 1. B is the answer. The CFP certificant should not engage in any discussion or activity with regard to legal recourse against the tax preparer. This issue can only be resolved through legal process, and a CFP certificant must avoid attempting to practice law. The CFP certificant can and perhaps should advise the inquirer that a matter of this nature requires an attorney. Therefore, (2) and (4) are incorrect, and (1) and (3) are correct. 2. D is the answer. Before doing anything else, the planner should inform the client of the situation. The client can then decide on the next step to take, if any. 3. C is the answer. The client needs to be notified so that an amended return can be filed. George Thomas cannot notify the IRS without the client s consent because he would be violating the confidentiality of the client in providing the information. 4. B is the answer. The local authorities should be advised of the theft or embezzlement of the money from the client s account. It may be necessary to report the act to other regulatory authorities as well, such as the FINRA or the SEC, if the money was taken from a securities account. Notifying the CFP Board would not be appropriate because the Board has no jurisdiction over financial planners who do not have the CFP certification. 5. B is the answer. (3) is impermissible if the client has not given consent Keir Educational Resources