1. © 2013 All materials are proprietary. I. Richard Ploss, Esq. CPA, CFP © Preti Flaherty Beliveau & Pachios, LLP Financial Planning— Standards, Ethics and Liability

2. 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

3. 3© 2013 All materials are proprietary. 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 chaos 1. 1 See Leimberg, Stinsky, Doyle and Jackson, Tools & Techniques of Financial Planning, (9 th Edition National Underwriter 2009). PART I: What is Financial Planning (A Working Definition)

4. 4© 2013 All materials are proprietary. 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)

5. 5© 2013 All materials are proprietary. PART II: The Substantive Components of Personal Financial Planning The personal financial planning process really embodies the following disciplines: Cash flow planning and budgeting Risk management Investment planning Income tax planning Retirement planning Estate planning

6. 6© 2013 All materials are proprietary. 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: Banker Certified Public Accountant or Enrolled Agent Lawyer (preferably with an estate planning/tax background) Insurance Professional Investment Professional

7. 7© 2013 All materials are proprietary. 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.

8. 8© 2013 All materials are proprietary. 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.

9. 9© 2013 All materials are proprietary. 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

10. 10© 2013 All materials are proprietary. 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 College The Investment Management Consultant’s Association (IMCA) The CFA Institute The Financial Planning Standards Board (FPSB)

11. 11© 2013 All materials are proprietary. Professional Designations and Compensation Models Compensation Models Fee Only Commission Only Fee Based

12. 12© 2013 All materials are proprietary. Professional Designations and Compensation Models Fee Only vs. Fee Based Financial Planners Fee 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 client  Commissions paid to him/her by a mutual fund company, insurance company or investment partnership

13. 13© 2013 All materials are proprietary. PART IV: Standards and Ethics Standards Defining the client or prospective client relationship Information disclosed to prospective clients and clients Prospective client and client information and property Obligations to prospective clients and clients

14. 14© 2013 All materials are proprietary. 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.)

15. 15© 2013 All materials are proprietary. 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)

16. 16© 2013 All materials are proprietary. Standards and Ethics The Fiduciary Standard For Personal Financial Planners Historical perspective: Agent vs. Fiduciary The 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…

17. 17© 2013 All materials are proprietary. Standards and Ethics The Financial Planning Coalition In December 2008, the CFP Board, the FPA and NAPFA entered into a strategic alliance to pursue consumer protection and industry reform.

18. 18© 2013 All materials are proprietary. 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 always 2. 2 It 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.

19. 19© 2013 All materials are proprietary. 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.

20. 20© 2013 All materials are proprietary. PART V: Issues and Applications Issue #1: The Compensation Issue (Fee Only vs. Fee Based) Historically, biggest issue What’s the difference? Informed decision? Proposed solution

21. 21© 2013 All materials are proprietary. Issues and Applications Issue #2: Fiduciary Standard vs. Broker Dealer Model in Financial Planning Closely related to compensation issue Nearly all providers would state they act on behalf of clients’ best interest Impact of compensation tied to product provider

22. 22© 2013 All materials are proprietary. 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?

23. 23© 2013 All materials are proprietary. Issues and Applications Issue #3: The “One Stop Shop” Issues The “One Stop Shop” Model  Definition

24. 24© 2013 All materials are proprietary. 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?

25. 25© 2013 All materials are proprietary. 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?

26. 26© 2013 All materials are proprietary. Issues and Applications Example #2:… –Fee-only planner working for an institution that also provides financial products

27. 27© 2013 All materials are proprietary. 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.