© 2013 All materials are proprietary. I. Richard Ploss, Esq. CPA, CFP © Preti Flaherty Beliveau & Pachios, LLP Financial Planning— Standards, Ethics and.

© 2013 All materials are proprietary.

I. Richard Ploss, Esq. CPA, CFP©

Preti Flaherty Beliveau & Pachios, LLP

Financial Planning—Standards, Ethics and Liability

2© 2013 All materials are proprietary.

• 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)

Agenda

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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).

PART I: What is Financial Planning (A Working Definition)

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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)

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PART II: The Substantive Components of Personal Financial Planning

The personal financial planning process really embodies the following disciplines:Cash flow planning and budgetingRisk management Investment planningIncome tax planningRetirement planningEstate planning

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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:BankerCertified Public Accountant or Enrolled AgentLawyer (preferably with an estate planning/tax background)Insurance ProfessionalInvestment Professional

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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.

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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.

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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

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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 CollegeThe Investment Management Consultant’s Association (IMCA)The CFA InstituteThe Financial Planning Standards Board (FPSB)

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Professional Designations and Compensation Models

Compensation ModelsFee OnlyCommission OnlyFee Based

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Professional Designations and Compensation Models

Fee Only vs. Fee Based Financial PlannersFee 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 clientCommissions paid to him/her by a mutual fund company,

insurance company or investment partnership

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PART IV: Standards and Ethics

StandardsDefining the client or prospective client relationshipInformation disclosed to prospective clients and clientsProspective client and client information and propertyObligations to prospective clients and clients

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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.)

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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)

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Standards and Ethics

The Fiduciary Standard For Personal Financial PlannersHistorical perspective: Agent vs. FiduciaryThe 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…

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Standards and Ethics

The Financial Planning CoalitionIn December 2008, the CFP Board, the FPA and NAPFA entered into a strategic alliance to pursue consumer protection and industry reform.

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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.

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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.

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PART V: Issues and Applications

Issue #1: The Compensation Issue (Fee Only vs. Fee Based)Historically, biggest issueWhat’s the difference? Informed decision?Proposed solution

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Issues and Applications

Issue #2: Fiduciary Standard vs. Broker Dealer Model in Financial PlanningClosely related to compensation issue Nearly all providers would state they act on behalf of clients’ best interestImpact of compensation tied to product provider

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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?

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Issues and Applications

Issue #3: The “One Stop Shop” IssuesThe “One Stop Shop” Model

Definition

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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?

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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?

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Issues and Applications

• Example #2:…– Fee-only planner working for an institution that also

provides financial products

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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.