Here’s the big news for CFP® certificants: Effective October 1, 2019, a fiduciary duty is owed to clients in more circumstances than under the previous CFP Board requirements.
Fiduciary duty is the very foundation upon which a great deal of the new Code and Standards rests. A CFP® certificant is held to a Fiduciary Duty whenever providing financial advice. The Fiduciary Duty includes the duties of loyalty, care, and following client instructions. Let’s consider just one of these duties – loyalty – today. Here’s what the CFP Board says about loyalty in Standard of Conduct A-1(a):
A CFP® professional must:
- Place the interests of the Client above the interests of the CFP® Professional and the CFP® Professional’s Firm;
- Avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the Client, obtain the Client’s informed consent, and properly manage the conflict; and
- Act without regard to the financial or other interests of the CFP® professional, the CFP® Professional’s Firm, or any individual or entity other than the Client, which means that a CFP® professional acting under a Conflict of Interest continues to have a duty to act in the best interests of the Client and place the Client’s interests above the CFP® professional’s.
As you digest this CFP Board requirement, questions may occur to you such as:
- When is the certificant held to a fiduciary duty?
Answer: Anytime the certificant provides Financial Advice.
- What constitutes Financial Advice?
Answer: Financial advice occurs when the certificant makes a recommendation to a client to act or not to act. That’s right, a certificant who recommends to a client that they hold their Amazon stock and NOT sell it has made a recommendation, provided Financial Advice, and has a fiduciary duty to their client.
The following CFP Board-released case study shows us this fiduciary dynamic in action.
Board-Released Case Study
Allison is a CFP® professional who is a registered representative of a broker-dealer. Allison has provided brokerage services to her Client, Mateo, several times over the past three years. Typically, Mateo wants to purchase a specific stock and asks Allison for her opinion before purchasing the stock. Mateo recently asked Allison what she “thought” about Mateo buying a specific stock he intended to purchase. Allison told Mateo that she has looked into the company and that she likes the stock and believes it is undervalued. Mateo then directed Allison to purchase the stock. Does Allison have a Fiduciary Duty [to Mateo and, if so, why?]
- A - Allison does not have a Fiduciary Duty because Mateo identified the specific stock at issue.
- B - Allison has a Fiduciary Duty because she provided Financial Advice when she communicated with Mateo regarding the advisability of purchasing the stock.
- C - Allison does not have a Fiduciary Duty because Mateo ultimately directed Allison to buy the stock after Allison communicated with Mateo regarding the advisability of the purchase.
- D - Allison has a Fiduciary Duty because she effected the stock transaction [placed the trade] for Mateo.
According to the CFP Board, “Response B is the best response... At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary and, therefore, act in the best interests of the Client. A Client is any person to whom the CFP® professional provides or agrees to provide Professional Services pursuant to an Engagement. Financial Advice includes a communication that, based on its content, context, and presentation, would reasonably be viewed as a recommendation that the Client take or refrain from taking a particular course of action with respect to, among other things, the value of or the advisability of investing in, purchasing, holding, gifting, or selling Financial Assets. Financial Assets include securities, insurance products, real estate, bank instruments, commodities contracts, derivative contracts, collectibles, or other financial products.
Mateo asked Allison about a specific stock before making a decision whether to purchase the stock. The content, context, and presentation of this communication makes clear that Mateo was asking for Allison’s recommendation with respect to the advisability of purchasing the stock. When Allison responded to Mateo’s question by saying that she likes the stock and that the stock is undervalued, she made a communication that reasonably would be viewed as a recommendation that Mateo purchase the stock. A stock is an equity security, which is a Financial Asset. Mateo is a Client because Allison provided Financial Advice and related services to Mateo pursuant to an Engagement. Therefore, because Allison made a recommendation to a Client about a Financial Asset, she has provided Financial Advice. Since a Fiduciary Duty arises when a CFP® professional provides Financial Advice to a Client, Allison has a Fiduciary Duty and was required to act as a fiduciary and, therefore, in Mateo’s best interests when providing the Financial Advice.
Response A is not the best response. Allison has a Fiduciary Duty because she provided Financial Advice to Mateo, her Client. A CFP® professional who provides Financial Advice to a Client concerning a specific Financial Asset has a Fiduciary Duty even if it was the Client who asked for information about that Financial Asset.
Response C is not the best response because Allison’s obligation to satisfy the Fiduciary Duty does not depend upon whether Mateo directed the transaction. Allison must act as a fiduciary when providing Financial Advice. Allison provided Financial Advice to Mateo because Mateo is a Client and Allison made a recommendation to Mateo about a Financial Asset.
Response D is not the best response. Allison has a Fiduciary Duty because she provided Mateo with Financial Advice. Under other circumstances (such as a Client-directed purchase), a CFP® professional may purchase a stock for a Client without providing Financial Advice. In that case, the CFP® professional does not have a Fiduciary Duty.”
This is but one key aspect of the fiduciary standard in the new Code and Standards. The CFP Board publishes a helpful and cogent guide to the “must knows” of the new Code and Standards at this link: ROADMAP.
Stay tuned next month as we continue unpacking the Code and Standards.