United States
Hong KongConflicts of interest: avoid, or disclose and manage
A CFP professional must avoid conflicts of interest, or fully disclose material conflicts and obtain the client's informed consent and properly manage them. Disclosure without consent and management does not satisfy the Standard.
Three requirements, and questions are built on candidates remembering only the first.
Disclose, consent, manage
- Fully disclose the material conflict, in terms sufficiently specific for the client to understand it.
- Obtain informed consent - the client must actually understand and agree.
- Properly manage the conflict so it does not compromise the duty of loyalty.
All three. A planner who discloses a revenue-sharing arrangement in a document the client did not read has not obtained informed consent, and has not managed anything.
What "material" means
A conflict a reasonable client would consider important in evaluating the recommendation or the relationship.
That is a client-facing test rather than a planner-facing one, which matters. "I did not think it would bother them" is not the standard.
Common material conflicts
- Commission or differential compensation between products.
- Proprietary products, and incentives to use them.
- Revenue sharing, or payments from product providers.
- Referral arrangements in either direction.
- Sales targets, bonuses or contests.
- Personal holdings in a recommended security.
- Family or business relationships with a recommended provider.
The referral arrangement is the one people miss. A fee for sending a client to an accountant is a conflict, and so is receiving one.
The Standards permit disclosure that is sufficiently specific for the client to understand. Oral disclosure can satisfy that and it leaves nothing to demonstrate afterwards. Where a question offers written and oral options, the written one is usually the better answer.
When a conflict must be avoided
Where it cannot be managed consistently with the duty of loyalty - where no amount of disclosure would let the planner act without regard to their own interest.
Borrowing from or lending to a client is dealt with by a separate, near-absolute prohibition, with narrow exceptions such as a client who is a family member or a lender in the business of lending. Commingling client assets with your own is similarly prohibited.
How questions are built
A scenario, a disclosure, and four options. One says disclosure was enough. One says the conflict should have been avoided. One asks for consent and management. One is about documentation.
Ask whether the conflict could be managed at all. If yes, the answer includes consent and management. If no, avoidance is the 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
What must a CFP professional do about a conflict of interest?
Avoid it, or fully disclose it, obtain the client's informed consent, and properly manage it. All three parts of the second route are required.
Is disclosure enough?
No. Disclosure without informed consent and active management does not satisfy the Standard, and a client who did not read the document has not consented.
What makes a conflict material?
That a reasonable client would consider it important in evaluating the recommendation or the relationship. It is a client-facing test, not a planner-facing one.
Are referral fees a conflict?
Yes, in both directions. Paying for a referral and receiving one are both material conflicts, and it is the example candidates most often overlook.
Can you borrow money from a client?
Only under narrow exceptions, such as a client who is a family member or a lender in the business of lending. The general position is a prohibition, as is commingling client assets with your own.