United States
Hong KongWhen Financial Planning applies, and the Practice Standards with it
The Practice Standards apply when a CFP professional provides Financial Planning, or agrees to. Whether an engagement is Financial Planning turns on how integrated the advice is - the number of relevant elements, the portion and amount of assets affected, and the time period covered.
Two definitions, one test, and a distinction that decides several questions.
Financial Advice versus Financial Planning
Financial Advice is a communication that, based on its content, context and presentation, would reasonably be viewed as a recommendation - about assets, debts, insurance, retirement, tax, estate, or the selection of another adviser.
Financial Planning is a collaborative process designed to maximize a client's potential for meeting life goals through advice that integrates relevant elements of their personal and financial circumstances.
The word doing the work is integrates.
The test
Whether the advice requires integration is assessed on factors including:
- The number of relevant elements of the client's circumstances the advice may affect.
- The portion and amount of the client's financial assets the advice may affect.
- The length of time the client's circumstances may be affected.
- The effect on the client's overall exposure to risk.
- The barriers to modifying the actions taken to implement the advice.
More elements, more assets, longer horizon, greater risk change and higher barriers all point towards Financial Planning.
The fiduciary duty applies to all Financial Advice, whether or not the engagement is Financial Planning. What the classification changes is whether the seven-step Practice Standards apply on top.
Three situations
| Situation | What applies |
|---|---|
| The planner agrees to provide Financial Planning | The Practice Standards |
| The advice requires integration under the factors | The Practice Standards |
| The client has a reasonable basis to believe Financial Planning will be provided | The Practice Standards, unless the planner clarifies otherwise |
| Financial Advice not requiring integration | The fiduciary duty, without the Practice Standards |
That third row matters. A client's reasonable belief can pull an engagement into Financial Planning, and the remedy is for the planner to clarify the scope - in writing, before the work.
The narrower-scope route
A planner may agree with a client to provide services other than Financial Planning, and must describe the services and explain that the scope is limited.
A client cannot waive the fiduciary duty, and the planner cannot avoid the Practice Standards simply by declaring the engagement narrow when the advice plainly integrates.
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 do the CFP Practice Standards apply?
When a CFP professional provides or agrees to provide Financial Planning, or where the client has a reasonable basis to believe Financial Planning will be provided and the planner has not clarified otherwise.
What is the difference between Financial Advice and Financial Planning?
Financial Advice is a communication that would reasonably be viewed as a recommendation. Financial Planning is a collaborative process that integrates relevant elements of the client's circumstances.
What factors decide whether integration is required?
The number of relevant elements affected, the portion and amount of assets involved, the length of time affected, the change in overall risk exposure, and the barriers to modifying the actions taken.
Does the fiduciary duty depend on this classification?
No. The fiduciary duty applies to all Financial Advice. The classification decides whether the seven-step Practice Standards apply on top of it.
Can a planner limit the scope of an engagement?
Yes, by agreeing services other than Financial Planning, describing them and explaining that the scope is limited. But the fiduciary duty cannot be waived, and declaring a narrow scope does not help where the advice plainly integrates.