Chapter 2: Code of Ethics and Standards of Conduct

Which of the following situations appears to be a violation of the CFP Board’s Code of Ethics?

• Harry, a CFP® professional, analyzed three different growth funds for a client

• Shari, a CFP® professional, maintained password protection for electronically stored client files.

• Barry, a CFP® professional, shared that a competitor has many disgruntled clients.

• Larry, a CFP® professional, disclosed his commissions as a percentage of the amount of mutual fund shares that his clients might purchase.

Barry, a CFP® professional, shared that a competitor has many disgruntled clients. This violates the ethical duty of Professionalism.

CFP® professionals are required to conduct themselves in a manner that reflects positively on the profession and must refrain from making degrading, defamatory, or derogatory statements regarding competitors.(Exam Note: The other options are completely compliant: Harry is performing Diligence, Shari is protecting Confidentiality, and Larry is transparently Disclosing Conflicts of Interest/Fees).

According to the CFP Board's Standards of Conduct, when is a CFP® professional required to act as a fiduciary?

Always when providing financial advice to a client.

Exam Note: There is no exception or loophole. If you are providing "Financial Advice" as defined by the Board, the Fiduciary Standard applies instantly.

Under the Fiduciary Standard, what are the core requirements of the Duty of Loyalty?

1. Place client interests first: Hold them above those of the planner and the firm.
   
   

2. Manage conflicts: Avoid or fully disclose and manage conflicts of interest to maintain the client's best interest above all.

Under the Fiduciary Standard, what are the core requirements of the Duty of Care?

Act with the skill, prudence, and diligence of a prudent professional in consideration of the client's goals, risk tolerance, and personal circumstances.

Exam Note: Think of care as the "Competency and Homework Standard." You cannot just mean well (Loyalty); you must actually perform the analysis properly, like a seasoned professional would.

Under the Fiduciary Standard, when is a CFP® professional required to comply with a client's instructions, objectives, policies, and restrictions?

Always, presuming they are reasonable and lawful.

Exam Note: Watch out for exam traps where a client asks you to do something slightly unusual but completely legal. If it is lawful and reasonable, you must execute it—even if you personally prefer a different strategy.

Who among the following CFP® professionals is most likely to have breached the fiduciary duty to clients?

• Beth, who thought her conservative client was not assuming enough investment risk, purchased aggressive growth stocks in the client’s account anyway.
  
  

• Seth, who failed to make profits for his clients in the past year.
  
  

• Stan, who vetted the three CPAs he has been recommending to his clients for tax preparation.
  
  

• Fran, who is an insurance producer and recommends long-term care to many clients, presents alternatives among several long-term care insurance carriers and policies.

Beth failed to honor her client’s investment policy and risk-related restriction. Regarding Seth, failing to make profits in a particular year is not a breach of fiduciary duty. Stan respected the interests of her clients by checking the credentials and experience of the recommended professionals. Fran honored the interest of her client by comparing alternative products, seeking the best for her client.

Does consent to the clients understanding of a conflict of interest need to be in writing?

No

Which of the following statements regarding conflicts of interest best reflects CFP Board’s position?

• A CFP® professional with conflicts of interest violates his or her fiduciary duty.
  
  

• Conflicts of interest should be disclosed in full prior to or at the time at which the financial advice relating to the conflict of interest is provided.
  
  

• Conflicts of interest should be disclosed no later than the time at which the financial advice pertaining to the conflict of interest is provided.
  
  

• Provided that the CFP® professional continuously operates in the best interest of clients, the requirement to disclose specific conflicts of interest is generally waived.

Conflicts of interest should be disclosed in full before or at the time at which the financial advice relating to the conflict of interest is provided. CFP Board recognizes that in real-world financial planning practice, many conflicts of interest cannot be avoided. Conflicts of interest, per se, do not breach the fiduciary duty. Even if the CFP® professional acts in the best interests of the client, specific conflicts of interest must nevertheless be disclosed.

What professional title is given to a specific type of financial advisor who works with individuals and businesses to create, implement, and monitor a plan to meet long-term financial goals, either through specialized focus areas or comprehensive multi-area planning?

A Financial Planner

What broad professional title describes a paid professional (such as a stockbroker, insurance agent, or money manager) who helps clients manage money, requires a Series 65 license to work with the public, and must register at the state or federal level?

A Financial Advisor

What is the core distinction between the scope of a financial advisor versus a financial planner, and how do their structural definitions overlap?

• The Distinction (Scope):
  
  

  • Financial Advisor is a broad, umbrella term for any professional paid to manage money or handle specific financial matters (e.g., stockbrokers, insurance agents, bankers).
    
    

  • Financial Planner is a specific subset of advisor whose explicit focus is creating, implementing, and monitoring a strategy to meet long-term financial goals (often through comprehensive planning).
    
    

• The Overlap:

  • A financial planner is a type of financial advisor, but not all financial advisors are financial planners.

Under the CFP Board Standard for Providing Information to a Client, by when must a CFP® professional deliver the required relationship and scope disclosures when providing or agreeing to provide financial planning?

No later than the time of the engagement.

If a CFP® professional experiences a material change to previously presented information (such as a new disciplinary action or bankruptcy), what is the exact timeframe allowed to inform the client?

Within 90 days of the occurrence of the event.

(Exam Note: The notification must also explicitly include the webpages where the event is cited. Direct internet links (URLs) where they can read the official public records

When disclosing compensation other than fees (e.g., commissions) to a prospect, does a CFP® professional have to disclose the exact dollar amount they anticipate receiving?

No. The planner is not required to disclose the exact amount upfront (as implementation details are not yet clear), but they must disclose the methods of compensation (e.g., commissions on mutual funds, 12b-1 fees, or insurance products).

True or False: The CFP® Board's compensation disclosure requirements only focus on direct compensation paid to the individual CFP® professional.

False. The disclosure rules apply to the methods of compensation for the individual planner, the financial planning firm, and any related parties arising out of the client relationship.

Are "hidden" or non-transparent compensation arrangements—such as commissions on the cash-value savings account of a whole life insurance policy—exempt from CFP® Board disclosure rules if they do not directly lower the client's current investment return?

No. The planner must disclose all methods of compensation arising from the relationship, including non-transparent arrangements like insurance cash-value commissions, annuities, and trailing 12b-1 fees.

An independent solo RIA markets their practice as "Fee-Only" and charges a 1% AUM fee. The advisor refers a client to a local insurance agent for a key-person policy. The agent writes the policy, collects a commission, and sends a $500 referral check to the advisor's brother, who runs an independent marketing LLC. The advisor receives no direct cash.

According to the CFP® Board, can the advisor remain "Fee-Only"?

No. The advisor can no longer market themselves as "Fee-Only."

The Related Party Rule: The CFP® Board's definition of "Fee-Only" is absolute. It applies not just to what the individual CFP® professional or their firm directly receives, but also to what any Related Party receives as a result of the client relationship.

• Family Ties: A family member (like a brother) is considered a related party. Because the brother received a referral fee triggered by the client's insurance implementation, the "Fee-Only" status is completely broken.

• The Standard: The advisor must now describe their compensation method as "Fee and Commission."

An independent solo RIA markets their practice as "Fee-Only." They charge clients a 1% AUM fee on traditional investment accounts.

When implementing a plan, a client requires a complex corporate key-person life insurance policy. Because the RIA does not sell insurance, the advisor refers the client to a trusted local insurance agent. The insurance agent writes the policy, collects a standard commission from the carrier, and out of professional courtesy, sends a $500 referral check to the advisor's brother, who operates an independent marketing LLC. The advisor does not receive any direct cash from this transaction.

According to the CFP® Board Code of Ethics and Standards of Conduct, which of the following statements is correct?

A. The advisor can remain "Fee-Only" because the referral fee was paid to a related third-party entity, not directly to the CFP® professional or their RIA firm.

B. The advisor can remain "Fee-Only" because the insurance product implementation was entirely outside the scope of the traditional AUM investment account.

C. The advisor can no longer market themselves as "Fee-Only" because a related party is receiving a commission/referral fee resulting from the client relationship.

D. The advisor can remain "Fee-Only" as long as they disclose the $500 payment to the client in writing within 90 days of the check being issued.

C. The advisor can no longer market themselves as "Fee-Only"

The board deliberately uses structures where the advisor gets zero direct cash to see if you will fall for the "corporate veil" or "family separation" trap. Because the brother's business pocketed a referral check directly resulting from the client relationship, the "Fee-Only" designation is entirely broken. The practice must now be described as Fee and Commission (or Fee-Based).

Under CFP Board standards, what constitutes sales-related compensation, and what are the 7 specific examples listed in the curriculum?

Sales-related compensation is any compensation received by a CFP® professional or their firm when a client purchases or sells a financial asset (distinct from management or advisory fees).

The 7 core examples are:

1. Commissions

2. 12b-1 fees

3. Trailing commissions

4. Bid/ask spreads

5. Transaction fees

6. Revenue sharing

7. Solicitor fees

Identify the situation below that represents sales-related compensation under the CFP Board’s Code of Ethics and Standards of Conduct:

• A CFP® professional is a registered representative at a broker-dealer that makes a market in an over-the-counter stock. The broker-dealer sells to and buys from the client, pocketing the revenue generated by the bid/ask spread.
  
  

• The firm at which the CFP® professional is employed charges ongoing administrative and maintenance fees to depositors with donor-advised funds.
  
  

• Part of the wrap fees charged to customers holding wrap accounts with a broker-dealer is allocated strictly to ongoing advisory services rather than to transactions.
  
  

• An administrator is paid a flat, fixed hourly rate to handle compliance paperwork for a firm, and does not engage in any client-facing financial planning activities.

A CFP® professional is a registered representative at a broker-dealer that makes a market in an over-the-counter stock. The broker-dealer sells to and buys from the client, pocketing the revenue generated by the bid/ask spread.

Mark-ups, mark-downs, and bid/ask spreads pocketed by a market maker or broker-dealer represent sales-related compensation.

Under which of the following circumstances, if any, would the requirement that compensation from a financial planning client to a related party be waived?

• If the related party was a cousin.
  
  

• If the firm maintains procedures to prohibit its employees from recommending that clients purchase financial assets through parties related to employees or control persons of the firm.
  
  

• If the related party was not a “blood relative.”
  
  

• There are no circumstances under which the requirement to disclose compensation from a client to a related party would be waived.

If the firm maintains procedures to prohibit its employees from recommending that clients purchase financial assets through parties related to employees or control persons of the firm.

If the CFP® professional or the CFP® professional’s firm implements procedures to prevent the CFP® professional or the firm from recommending that any client obtain financial assets through a related party, the firm will generally have no requirement to disclose sales-related compensation to related parties. (Because there shouldn’t be any.) Cousins and in-laws are considered to be related parties, although they may not be blood relatives.

Which of the following forms of conduct would generally not be expected of a CFP® professional in the context of recommending another financial or legal professional to help a client implement a financial plan?

• To assume financial responsibility for any losses to investment accounts based on the recommendations of the professional to whom the client was referred by the planner.

• To research information regarding the recommended professional’s education and experience.

• To disclose any referral fees that the planner has, may or will receive in exchange for the recommendation.

• To feel reasonably assured that the recommended professional will act in the client’s best interest.

To assume financial responsibility for any losses to investment accounts based on the recommendations of the professional to whom the client was referred by the planner.

It would generally not be expected that the CFP® professional assume financial responsibility for any losses to investment accounts based on the recommendations of the professional to whom the client was referred by the planner. The planner should carefully vet the recommended professional and feel comfortable that the other professional will also act in the client’s best interest. Referral fees, whether received directly or indirectly, must be disclosed.

If a CFP is recommending an additional professional to the client and the recommended professional will or intends to provide economic benefit to the CFP professional, the firm, or related party, when does the CFP professional have to disclose that economic benefit to the client?

No later than the time of the engagement.

Under CFP Board standards, borrowing money from or lending money to clients is generally prohibited.

What are the two specific exceptions to this rule?

1. The client is a member of the CFP® professional’s family.
   
   

2. The lender’s normal business entails the business of lending money (e.g., a bank or credit union).

When is commingling of a client's money or property with the assets of the CFP professional or the firm acceptable?

Commingling is always prohibited. Under no circumstances is that allowed.

Does the CFP Board ever approve of a CFP® professional borrowing money from a client?

• Never. Borrowing from clients is not allowed.
  
  

• Borrowing from a family member is generally permitted.
  
  

• Borrowing from a client who regularly engages in the business of lending is permitted.
  
  

• Both borrowing from a family member and borrowing from a client who regularly engages in the business of lending are permitted.

Both borrowing from a family member and borrowing from a client who regularly engages in the business of lending are permitted.

How does the CFP Board define Financial Planning?

a collaborative process intended to maximize a client’s potential for meeting life goals by applying financial advice that considers numerous and relevant aspects of the client’s financial and personal life.

According to the CFP Board’s Standards of Conduct, which of the following statements regarding financial planning are correct?

• I. It is a process of logical steps.

• II. It is centered around a client’s financial goals.

• III. It reflects only financial aspects of the client’s life.

• IV. It is a collaborative endeavor.

Correct Statements: I, II, and IV only.

The "Only" Trap: The exam loves the word "only" to create false constraints. Financial planning does not reflect only financial aspects; a CFP® professional must look at the big picture and integrate both the financial and personal aspects of a client's life.

A CFP professional is in a preliminary meeting with Prudence Prospect, who has not yet formally engaged the planner. Prudence states, “Look, I don’t want to make a big deal out of this financial stuff. I don’t have the patience to answer a lot of questions and discuss my personal life. Just tell me the best investments to buy now.”

Under the CFP Board’s Practice Standards, which of the following responses to Prudence would be acceptable?

I. Decline to take Prudence as a client.

II. Explain to Prudence that unless she provides you with the information you request, the services you can offer will be limited.

Both I and II.

• Your Options: If a prospect completely refuses to engage in the collaborative financial planning process or withhold critical information, you have two compliant paths: you can either respectfully decline/terminate the relationship right there, or strictly limit the scope of the engagement to the narrow services you can actually perform (like a basic transaction).

Under the CFP Board’s Standards of Conduct, what is the most important matter to consider above all others?

• Whether the information provided by the client is accurate and complete.

• Whether the client’s best interests are being served.

• Whether the CFP® professional is following the policies of the firm.

• Whether the CFP® professional is honoring his or her personal values.

Whether the client’s best interests are being served.

The client's best interest is the absolute core of the Fiduciary Duty. It must be considered above everything else.

What characterizes qualitative data under CFP Board standards?

Qualitative data is subjective, emotional, or attitudinal. It focuses on the client’s feelings, values, and choices.

What are some key examples of qualitative data that would be examined in the financial planning process?

• Goals, priorities, expectations, and values (ethical/religious).

• Risk Tolerance (how the client feels about risk).

• Health and life expectancy presumptions.

• Family circumstances.

• Current financial planning actions.

What characterizes quantitative data under CFP Board standards?

Quantitative data is objective, factual, and measurable. It is mathematical rather than attitudinal.

What are some key examples of quantitative data that would be examined in the financial planning process?

• Age and number of dependents.

• Financial statements (income, expenses, assets, liabilities, net worth, savings).

• Investment account sizes, balances, and asset allocations.

• Risk Capacity (the mathematical level of risk needed to hit a goal).

• Insurance coverages, tax exposures, employee benefits, and estate plans.

Identify the item of quantitative data from the list below:

• The client’s age

• The client’s health status

• The goal that the client claims is “most important”

• The client’s investment risk tolerance

The client’s age.

Quantitative data is objective, factual, mathematical, and measurable. A person's age is a concrete fact, making it quantitative. [1]

Identify the dialogue below that reflects qualitative information:

• “My executor is my daughter, Morticia.”

• “I am insured under a variable universal life policy.”

• “Will claiming the home office deduction increase the probability that the IRS will audit me?”

• “Our emergency fund covers six months of our fixed and variable expenses.”

“Will claiming the home office deduction increase the probability that the IRS will audit me?”

• Qualitative data focuses on a client's attitudes, emotions, worries, and perceptions. A client's anxiety or fear that a specific tax strategy might trigger an IRS audit is purely emotional and subjective.

It is generally required that implemented financial plans be monitored:

• As required by the SEC or, when appropriate, FINRA.

• Annually, at a minimum.

• Quarterly.

• As the planner and client mutually deem to be the appropriate frequency.

As the planner and client mutually deem to be the appropriate frequency.

The exam loves to throw out rigid regulatory options like "quarterly," "annually," or "per FINRA rules" to see if you will bite. The CFP® Board explicitly states that there is no single mandated frequency for monitoring a plan.

According to the CFP Board general rule, within what exact timeframe must a CFP® professional report an applicable misconduct charge, conviction, arbitration, or lawsuit?

Within 30 days of the charge or conviction.

In what format must a CFP® professional report a disciplinary event to the CFP Board, and what two core elements must that disclosure include?

• It must be in writing and include:

  • A narrative statement describing all material facts.

  • The outcome of the charge, conviction, arbitration, or lawsuit.

Under CFP Board rules, which of the following events must a CFP® professional report to the CFP Board within 30 days of receiving notice of the action?

• A CFP® professional did not contest a $1,000 fine imposed by FINRA.

• A firm settled a client's sales practice complaint for $3,000.

• A customer alleged that the CFP® professional, who was also a registered representative, was personally endorsing checks made out to the broker-dealer.

• The CFP® professional was deemed to have committed a "minor rule violation."

A customer alleging that the CFP® professional was personally endorsing checks made out to the broker-dealer.

Explanation: Misappropriating money from a client or customer is a serious violation. If a CFP® professional is charged with this conduct, they must report the charge to the CFP Board within 30 days of written notice. The other offenses listed are considered relatively minor in nature and generally do not require an immediate 30-day report to the CFP Board.