United States
Hong KongThe fiduciary duty: three components, and when it attaches
A CFP professional owes a fiduciary duty at all times when providing Financial Advice. It has three components: a duty of loyalty, a duty of care, and a duty to follow client instructions that are reasonable and lawful.
This is the single most examined idea in the domain, and the part that trips people is not what the duty requires. It is when it applies.
When it attaches
At all times when providing Financial Advice. Not only when doing Financial Planning, and not only for certain products.
That is broader than candidates expect, and broader than the regulatory position many planners work under day to day. A question describing a one-off product recommendation is still inside the duty.
The three components
| Duty | What it requires |
|---|---|
| Loyalty | Place the client's interests above your own and above your firm's; avoid or fully disclose and manage conflicts, with informed consent; act without regard to your own financial interest |
| Care | Act with the care, skill, prudence and diligence a prudent professional would exercise, in light of the client's goals, risk tolerance, objectives and circumstances |
| Follow Client Instructions | Comply with the terms of the engagement and follow all reasonable and lawful directions of the client |
Three names, and questions frequently ask which one a described failure breached. Learn them as a set with their content attached.
Loyalty is the one with teeth
The phrase "without regard to the financial or other interests of the CFP professional" is doing real work.
It is not "balance the interests". It is not "disclose and proceed". Disclosure and informed consent are available for conflicts that can be managed; they do not convert a self-interested recommendation into a compliant one.
Two suitable products, one paying the planner more, and the planner discloses the difference and recommends the higher-paying one. Disclosure was necessary and it was not sufficient. The duty of loyalty is what the question is about.
Care is measured against a prudent professional
Not against best practice, and not against hindsight. The test is what a prudent professional would have done with the information available, in light of this client's circumstances.
Which means a recommendation that turned out badly is not automatically a breach, and a recommendation that turned out well can still be one.
Following instructions has limits
Reasonable and lawful directions. A client instruction that is unlawful does not have to be followed, and one that is unreasonable can be declined.
A client insisting on an unsuitable concentrated position is the standard scenario. The planner documents the advice given, and where the instruction cannot be reconciled with the duty of care, terminating the engagement is a legitimate answer.
CFP® is a registered mark of Certified Financial Planner Board of Standards, Inc. We are not affiliated with, or endorsed by, CFP Board. Confirm any provision against the current Code and Standards at cfp.net before relying on it.
Common questions
When does a CFP professional owe a fiduciary duty?
At all times when providing Financial Advice - not only during Financial Planning engagements and not only for certain products. That breadth is what candidates most often get wrong.
What are the three components of the fiduciary duty?
The duty of loyalty, the duty of care, and the duty to follow client instructions that are reasonable and lawful.
Does disclosing a conflict satisfy the duty of loyalty?
Not on its own. Disclosure with informed consent is available for conflicts that can be managed, but it does not convert a recommendation made in your own financial interest into a compliant one.
Is a recommendation that loses money a breach of care?
Not automatically. Care is measured against what a prudent professional would have done with the information available, not against hindsight.
Must you follow every client instruction?
Only reasonable and lawful ones. Where an instruction cannot be reconciled with the duty of care, documenting the advice and, if necessary, terminating the engagement is legitimate.