Practice Standards for the Financial Planning Process

The new Code and Standards sets forth in Standard C, which contain the Practice Standards for the financial planning process, a principles-based documentation requirement that applies when a CFP® professional provides or is required to provide Financial Advice in accordance with the Practice Standards. A CFP® professional may memorialize information in a method of the CFP® professional’s choosing. The CFP® professional is not required to provide the information to the Client.

A CFP® professional must act prudently in documenting and retaining information, as the facts and circumstances require, taking into the account the significance of the information, the need to preserve the information in writing, the obligation to act in the Client’s best interests, and the CFP® Professional’s Firm’s policies and procedures. A CFP® professional may consider documenting the following information in writing, where relevant:

1. The qualitative and quantitative information the CFP® professional obtains from the Client;
2. The Client’s selected goals;
3. The CFP® professional’s analysis of the Client’s current course of action;
4. The CFP® professional’s analysis of potential alternative courses of action;
5. The assumptions and estimates used in developing the recommendations;
6. The recommendations the CFP® professional selects and the rationale for the recommendations;
7. The basis for the selection of actions, products, and services;
8. Actions the Client takes that deviate from the CFP® professional’s recommendations;
9. When engaged for monitoring, the CFP® professional’s analysis of the Client’s progress towards achieving goals; and
10. When engaged for monitoring and updating, which actions, products, and services are and are not subject to the CFP® professional’s monitoring responsibility, how and when the CFP® professional will monitor the actions, products, and services, how the CFP® professional will be informed of any material changes in the Client’s qualitative and quantitative information, and how and when a CFP® professional who is responsible for updating the Financial Planning recommendations will do so.

Documentation may be retained in, among other places, a client file, a Contact Management System file, a paper file, or a digital vault.  (Originally Published:  November 27, 2018)

A CFP® professional who is providing Financial Planning must complete the first five steps of the Financial Planning process that are set forth in Standard C. It is not necessary, however, for a CFP® professional to complete the last two steps of the Financial Planning process if those steps are specifically excluded from the Scope of Engagement. For example, some Clients may engage a CFP® professional to complete the first five steps of the Financial Planning process and then work with another financial services provider to implement or monitor those recommendations. However, Standard A.10 provides that a CFP® professional is responsible for implementing, monitoring, and updating the Financial Planning Recommendation(s) unless specifically excluded from the Scope of Engagement.  (Originally Published:  November 27, 2018)

The revised Practice Standards – which are set forth in Standard C of the new Code and Standards – increases the number of steps in the Financial Planning process from six to seven. The new Code and Standards provides a comprehensive update to the Practice Standards that reflects the delivery of Financial Planning and provides detailed requirements for the Financial Planning process. This FAQ highlights the following three structural changes, which also are set forth in the chart provided below:

1. CFP Board removed from the Practice Standards what had been the first step in the process – “Defining the Scope of the Engagement.” That standard now is a “Duty to Provide Information to a Client” that is addressed in Standard A.10. CFP Board made that change so that the Practice Standards would now solely address the delivery of Financial Planning.
2. The revised Practice Standards divide and re-order what had been Step 2 of the Financial Planning process into Steps 1 and 2 of the revised version: “Understanding the Client’s Personal and Financial Circumstances” and “Identifying and Selecting Goals.” The new Code and Standards thus now requires a CFP® professional to work with the Client to obtain information and analyze the Client’s personal and financial circumstances before mutually defining the Client’s goals and not after, as the current Practice Standards require. This change recognizes that for a CFP® professional to collaborate effectively with the Client to identify and then select goals, a CFP® professional first must understand the Client’s circumstances.
3. The new Code and Standards divides and reorganizes into three steps what previously had been Steps 3 and 4 under the existing Practice Standards. This process now requires a CFP® professional to “Analyze the Client’s Current Course of Action and Potential Alternative Course(s) of Action” (Step 3), “Develop the Financial Planning Recommendation(s)” (Step 4), and “Present the Financial Planning Recommendation(s)” (Step 5).

The chart below compares the existing and revised Practice Standards:

(Originally Published:  November 27, 2018)