We all have certain expectations when we purchase a product or service from someone, whether we realize it or not. Think of a doctor with a cigarette hanging out of his mouth and dirty fingernails asking you to stick your tongue out and say “ahh.” Or, a college professor who gives everyone an A, whether students turn in term papers that are publishable or written in Crayola.
Then, there are the less noticeable, though more common, instances: the oil change attendant who doesn’t ask you if you want a radiator flush and fill, or what blend of oil you want.
Of all these people, who are we likely to label a professional? None of them, if we’re conscientious consumers. More than anything else, the term professional makes us think of a process with a series of steps in it to achieve an expected end. Someone who follows these steps (and even better, who explains them to us), is the person we want.
Financial Planning: A Profession
Financial planning is a profession. Evidence of this is that it is defined by a series of steps that its’ practitioners follow. These are called practice standards, and, more than anything else, they are what make CFP certificants professionals.
What are these practice standards and how do they impact clients? Before answering that, let’s define what the financial planning process is. The financial planning process, as author Jeffrey B. Mershon defines it, is the process of determining whether and how an individual can meet life goals through the proper management of financial resources. This is the goal. So how do we get there? By following CFP Board’s practice standards.
The practice standards are quite simple; they’re each only one sentence long. We’ll list the standards first, and then, a brief explanation.
10 Practice Standards
100-1. The financial planning practitioner (FPP) and the client shall mutually define the scope of the engagement before any financial planning service is provided.
- This means that the client and the planner have to agree on what the client actually needs help with. There are eight main areas: education planning, employee benefit planning, estate planning, financial statement preparation & analysis, investment planning, retirement planning, risk management & insurance, and tax planning. Before any advice is given, a CFP® certificant must agree with the client on which of these areas is to be worked on. Before the client can get what they want, they have to know what they want.
200-1. The FPP and the client shall mutually define the client’s personal and financial goals, needs and priorities that are relevant to the scope of the engagement before any recommendation is made and/or implemented.
- This is a continuation of the first standard; it simply goes deeper. Once the general area that the client needs help with is defined, the planner is free to help the client assess three things. The first are goals, which are desires. For example, wanting to have $1M saved by age 55 is a goal. The second are needs, which are critical requirements. This might be a client getting current cash flow in order, or eliminating or reducing certain types of consumer debt. The third are priorities, which are important when clients have more than one need or goal. Making sure the monthly mortgage is paid is more important than starting an investment club orestablishing an emergency fund should have priority over a planned investment in mutual funds or stocks.
200-2. The FPP shall obtain sufficient quantitative information and documents about a client relevant to the scope of the engagement before any recommendation is made and/or implemented.
- This means to get statements and documents. The better the input (the client documentation), the better the output (the financial planning recommendations).
300-1. An FPP shall analyze the information to gain an understanding of the client’s financial situation and then evaluate to what extent the client’s goals, needs and priorities can be met by the client’s resources and current course of action.
- Good financial planning always asks what is best for the client. The first question, therefore, is whether or not the client needs to change anything. Can the client’s goals, needs and priorities be met without any changes? If so, the process is simple:don’t fix what isn’t broken.
400-1. The FPP shall consider sufficient and relevant alternatives to the client’s current course of action in an effort to reasonably meet the client’s goals, needs and priorities.
- If the client can’t meet their goals, needs and priorities without a change, the planner must consider alternatives. While there is no hard and fast definition of sufficient and relevant, one interpretation is that sufficient means more than one (allowing the client to make a choice among multiple options), and relevant means suited to the client’s goals, as defined in Standard 200-1.
400-2. The FPP shall develop the recommendation(s) based on the selected alternative(s) and the current course of action in an effort to reasonably meet the client’s goals, needs and priorities.
- This means that once the client chooses from one of the alternatives, the planner develops it, or fleshes it out. If the alternative chosen was a variable life insurance policy, now a carrier has to be chosen, as well as investments in the policy. Reasonable implies that communication is critical; clients have to understand the limitations – what can and cannot be done with planning.
400-3. The FPP shall communicate the recommendation(s) in a manner and to an extent reasonably necessary to assist the client in making an informed decision.
- The planner’s job is something like that of a translator. Financial literacy is an elective in school, for the most part – like Spanish or German. So later on in life, when things like high credit card APRs, bear markets, and inheritances bedevil clients, the end result is often the same as if they’d gotten a message in a foreign language – they don’t know what it means. Planners should explain, then, what they’re saying clients should do; why they should do it; and what the consequences of the action will be for them. Probably 90% of financial planning is simply helping people to understand.
500-1. The FPP and the client shall mutually agree on the implementation responsibilities consistent with the scope of the engagement.
- This turns Standard 400-3 into a verb. “OK, you’ll make the trades today, then.I’ll call you on Thursday to move the assets over into your other account.We’ll send you the insurance application tomorrow.”
500-2. The FPP shall select appropriate products and services that are consistent with the client’s goals, needs and priorities.
- The products simply have to be appropriate. Things that help define appropriate are the age of the client, their appetite for risk, their current cash flow and financial position, and so forth. This is pretty much common sense.
600-1. The FPP and the client shall mutually define monitoring responsibilities.
- Financial planning doesn’t end with changes in investments, or insurance, or the establishment of a savings program. It only begins there. With the incessant pace of change in our world, a critical task of planners is to ensure that they keep their clients informed of things that might affect their financial future. This must be communicated – continually. Following this step, as well as the nine before it, will ensure that anyone who walks into a CFP certificant’s office will come out knowing they’re being served by a professional. Should they expect less?