“Act in the client’s best interest” sounds straightforward.

In practice, however, CFP® professionals regularly encounter situations where the right course of action isn't nearly as obvious.

When does a casual conversation become financial advice? Does recommending the lowest-cost option always satisfy the fiduciary standard? What happens when a client insists on doing something you believe is a mistake? How much conflict-of-interest disclosure is enough? And when does providing financial advice cross the line into providing financial planning?

These were some of the practical questions explored during Financial Experts Network's recent Ethics CE for CFP® Professionals webinar, presented by Tom Duffy, CFP®.

Rather than treating ethics as simply a set of rules to memorize, the program focused on applying the CFP Board Code of Ethics and Standards of Conduct to situations financial professionals encounter every day.

When Does a Conversation Become Financial Advice?

One of the most important distinctions for CFP® professionals is recognizing when they're actually providing financial advice.

A communication may constitute financial advice when a client could reasonably view it as a recommendation to take—or refrain from taking—a particular course of action.

That could involve a financial plan, investments or other financial assets, investment policies or strategies, selecting or retaining another financial professional, or exercising discretionary authority over a client's assets.

General financial education and marketing aren't necessarily financial advice. But context matters.

Consider the difference between explaining how Roth conversions generally work and recommending that a particular client complete a Roth conversion based on that client's income, taxes, retirement assets and financial circumstances.

The first may be education. The second looks much more like personalized financial advice.

And once a CFP® professional is providing financial advice, another important obligation comes into play.

Once a CFP® Professional Is Providing Financial Advice, the Fiduciary Duty Applies

The webinar framed the CFP® professional's fiduciary responsibility around three important duties:

Duty of Care + Duty to Follow Client Instructions + Duty of Loyalty

The Duty of Care requires a CFP® professional to act with the care, skill, prudence and diligence appropriate to the client's circumstances.

Tom walked through a practical process advisors can use when developing recommendations:

1. Understand the client.
2. Determine the scope of the engagement.
3. Analyze the client's current and potential courses of action.
4. Develop the recommendation.
5. Present the recommendation.
6. Implement the recommendation when agreed upon and within the scope of the engagement.
7. Consider whether monitoring and updating are necessary.

This process becomes particularly important when there are several reasonable alternatives available to the client.

Does “Best Interest” Always Mean the Cheapest Option?

Consider a CFP® professional helping a client decide what to do with a former employer's 401(k).

The client might:

• Leave the assets in the former employer's plan.
• Move them to a new employer's plan.
• Roll them into an IRA.
• Take a distribution.

Suppose an IRA would cost more than remaining in the employer's retirement plan.

Does that automatically determine which option is in the client's best interest?

No.

As discussed during the webinar, cost is an important factor, but it should not necessarily be the only factor considered. The analysis may also involve available investments, services, creditor protections, tax considerations, convenience and the client's particular needs and objectives.

The broader lesson is important:

A fiduciary process shouldn't begin with a product or a predetermined outcome. It should begin with understanding the client and evaluating the reasonable alternatives available to that client.

What If Your Client Wants to Do Something You Think Is a Bad Idea?

Fiduciary duty doesn't mean the advisor gets to make every decision.

The client still controls the client's money.

Suppose a client wants to take an action that the CFP® professional believes is financially unwise. The advisor should explain the concerns, alternatives and potential consequences of the client's decision.

At the same time, CFP Board's standards include a Duty to Follow Client Instructions. A CFP® professional must comply with the client's reasonable and lawful directions, subject to the scope of the engagement and the professional's other obligations.

There may be situations involving diminished capacity, exploitation or undue influence where additional concerns arise. But simply disagreeing with a client's decision doesn't automatically give the advisor authority to substitute the advisor's judgment for the client's.

This highlights an important distinction:

Providing advice in a client's best interest and controlling the client's ultimate decision are not the same thing.

Every Compensation Model Can Create Conflicts

Conflicts of interest aren't limited to commissions.

An advisor charging an assets-under-management fee, for example, may face a conflict when advising a client whether to withdraw investment assets to pay off a mortgage.

Why?

Using portfolio assets to eliminate the mortgage could reduce the advisor's compensation.

Revenue-sharing arrangements, product compensation and referral arrangements can create other conflicts.

The important question isn't simply whether a conflict exists.

It's whether the CFP® professional appropriately avoids the conflict or fully discloses the material conflict, obtains the client's informed consent and properly manages the conflict while continuing to act in the client's best interest.

Would Your Client Actually Understand Your Disclosure?

Telling a client, “I charge an AUM fee,” describes how the advisor is compensated.

But does it adequately explain the potential conflict?

The webinar emphasized that clients need enough information to understand the nature and extent of a material conflict and how it could affect the advice they receive.

An advisor should consider whether a reasonable client would understand:

• Who is compensating the advisor.
• How the advisor is compensated.
• What financial incentive the arrangement creates.
• How that incentive could potentially affect the recommendation.

The goal is meaningful disclosure that allows the client to provide informed consent—not simply another paragraph of fine print.

While CFP Board's standards do not necessarily require every conflict disclosure to be provided in writing, documenting the disclosure and the client's informed consent is an important practice.

Three Words Advisors Should Remember: Document, Document, Document

Documentation was one of the recurring themes throughout the webinar.

A client file should help tell the story behind a recommendation.

What did you know about the client?

What alternatives did you consider?

Why did you recommend one strategy over another?

What conflicts existed?

What did you disclose?

What did the client ultimately decide?

Good documentation doesn't necessarily require pages of narrative. A well-maintained CRM, contemporaneous meeting notes, comparison worksheets and a repeatable process can provide a meaningful record of how a recommendation was developed.

This can become especially valuable when someone reviews the recommendation months—or years—later.

When Does Financial Advice Become Financial Planning?

Not every piece of financial advice constitutes financial planning.

But the distinction isn't determined simply by what the advisor calls the engagement.

Financial planning is a particular type of financial advice that requires integrating relevant elements of a client's personal and financial circumstances.

Factors discussed during the webinar included:

• The number of relevant elements involved.
• The portion and amount of the client's financial assets affected.
• How long the recommendation may affect the client.
• The client's exposure to risk.
• How difficult the decision would be to modify or reverse.

A limited investment recommendation involving a relatively small portion of someone's financial situation may remain financial advice.

An inheritance decision involving investments, taxes, retirement, a home purchase, college funding and employment changes may require a much more integrated financial-planning analysis.

The important point is that the substance of the advice—not simply the label placed on the relationship—helps determine whether financial planning is being provided.

What If the Client Doesn't Want Financial Planning?

Clients don't always want comprehensive financial planning.

Sometimes they simply want help with one specific issue.

That doesn't necessarily mean the CFP® professional must refuse to work with them. Instead, the professional should determine whether the engagement can reasonably be limited while still fulfilling the applicable professional obligations.

The key is clarity.

What are you doing? What aren't you doing? And does the client understand the scope of the engagement?

If the services can appropriately be limited, clearly defining and documenting those limitations can help both the advisor and client understand what is—and isn't—being provided.

Be Careful What—and Who—You Recommend

Financial professionals don't only recommend investments and financial strategies.

They may also recommend CPAs, attorneys, insurance professionals and other service providers.

The webinar emphasized that CFP® professionals should have a reasonable basis for making those recommendations.

That might involve considering a professional's:

• Experience.
• Qualifications.
• Reputation.
• Relevant expertise.

Compensation and referral arrangements should also be considered for potential conflicts.

Client privacy matters as well. Advisors should consider appropriate client authorization before sharing a client's information with another professional.

Technology Is Part of the Ethics Conversation Too

Technology is becoming increasingly embedded in financial advice—from financial-planning software and risk-analysis tools to artificial intelligence.

CFP® professionals have responsibilities when selecting, using and recommending technology.

The webinar emphasized the importance of exercising reasonable care and judgment, having an appropriate understanding of the technology and having a reasonable basis for believing it is reliable and appropriate for its intended use.

Simply knowing that another financial professional uses a particular technology, for example, may not provide an adequate basis for recommending it to a client.

As technology becomes more sophisticated and more deeply integrated into financial planning, these responsibilities are likely to become an increasingly important part of an advisor's due-diligence process.

Don't Forget the CFP Board's 30-Day Reporting Requirement

Another practical area covered during the program was a CFP® professional's responsibility to report certain events to CFP Board.

Certain specified events must be reported to CFP Board within 30 calendar days.

Depending on the circumstances and the applicable reporting requirements, these can involve regulatory or self-regulatory organization matters, certain criminal matters, customer complaints, employment terminations involving regulatory or firm-policy issues, litigation or arbitration, bankruptcies and liens.

One of the practical lessons from the discussion was simple:

Don't assume someone else is handling it.

A CFP® professional shouldn't automatically assume an employer will satisfy the individual's CFP Board reporting responsibilities or wait until the next certification renewal to address a potentially reportable event.

When an event occurs, determine promptly whether it triggers a reporting obligation and document the action taken.

Ethics Is Also About Building Better Processes

One of the broader lessons from the webinar was that ethical practice shouldn't depend entirely on remembering what to do when a difficult situation arises.

Strong firms build ethical obligations into their normal processes.

That might mean creating:

• A standard rollover-analysis worksheet.
• A conflict-of-interest disclosure process.
• CRM documentation standards.
• A financial-planning engagement checklist.
• A process for evaluating outside professionals.
• A technology due-diligence checklist.
• A procedure for identifying potentially reportable events.

The more these responsibilities become part of the firm's everyday workflow, the less likely they are to be overlooked when a difficult situation arises.

8 Questions to Ask About Your Own Practice

The webinar provides a useful opportunity for CFP® professionals to examine their own procedures.

Consider these questions:

1. Can I clearly identify when I'm providing education versus financial advice?
2. Do my files demonstrate why I made a particular recommendation?
3. Do I evaluate reasonable alternatives before making significant recommendations?
4. Would my clients actually understand how my conflicts could affect my advice?
5. Is the scope of each client engagement clearly defined and documented?
6. Do I have a reasonable basis for recommending other professionals to my clients?
7. Do I perform appropriate due diligence before selecting or recommending technology?
8. Would I recognize an event that may need to be reported to CFP Board within 30 days?

If any of those questions are difficult to answer, that may identify an area where the firm's procedures deserve another look.

The Bottom Line

Ethics isn't simply about avoiding obviously improper behavior.

For CFP® professionals, ethical responsibilities are embedded in everyday decisions: defining the engagement, understanding the client, evaluating alternatives, managing conflicts, explaining recommendations, following reasonable and lawful client instructions and documenting what happened.

The strongest ethical practices are often the least dramatic.

They're the repeatable habits and processes that demonstrate why a recommendation was reasonable, how the client's interests were considered and what information the client had when making the decision.

And when questions arise later, those processes—and the documentation supporting them—can make all the difference.

About the Webinar

Ethics CE for CFP® Professionals was presented by Tom Duffy, CFP® through Financial Experts Network. The interactive two-hour program examined the CFP Board Code of Ethics and Standards of Conduct through practical examples, case studies and attendee questions.

The program was designed to fulfill the 2-hour CFP® Ethics CE requirement and provide 2 IAR Ethics & Professional Responsibility CE credits for eligible attendees who satisfy applicable attendance, membership and reporting requirements.

This article is for educational purposes only and should not be considered legal or compliance advice. Financial professionals should consult their firm's policies, applicable regulations and appropriate legal or compliance professionals regarding their specific circumstances.