Financial planning process - CFP General Principles of Financial Planning

Financial planning process

The seven-step Practice Standards for the Financial Planning Process: understanding the client's circumstances, identifying and selecting goals, analysing the current course of action and alternatives, developing, presenting, implementing and monitoring the recommendations. Items place a planner action in the correct step.

CFP Board Practice Standards for the Financial Planning Process

Practice question for this objective

Free sampleGeneral Principles of Financial Planningmedium

Tomas, a CFP professional, has agreed to provide Financial Planning to a new client aged sixty-one who supports a disabled adult daughter. At the second meeting the client announces that he wants to buy a joint life annuity with most of his rollover balance. Tomas prepares a written recommendation for that annuity the same week, before he has collected the client's debts, employer benefits, health status, risk tolerance or objectives for his daughter's long-term support. Which statement best describes the defect in how Tomas has proceeded?

AHe has recommended a product before obtaining the client's qualitative and quantitative information and analysing the client's current course of action, so the recommendation rests on an incomplete picture of the client's situation. Correct
BHe has failed to present his recommendation orally as well as in writing, which the Practice Standards require whenever a product is recommended during a Financial Planning engagement.
CHe has simply followed the client's instruction, which the duty to follow client instructions requires of him, so no Practice Standard has been breached at this stage of the engagement.
DHe has breached the duty of confidentiality by taking into account benefits payable to the client's disabled adult daughter without first obtaining her own separate written consent to the planning work.

In a Financial Planning engagement, recommendations come after gathering the client's information and analysing the current course of action, not before. The Practice Standards for the Financial Planning Process run in a defined order for a reason: the planner cannot know whether a joint life annuity serves this client until the client's debts, employer benefits, health, risk tolerance and obligations to a disabled dependant are on the table. Committing a large share of a rollover balance to an illiquid income contract could easily conflict with the daughter's long-term support needs or with liquidity the client will require. Producing the recommendation first inverts the process and means the analysis, if it happens at all, is written to justify a decision already taken.

Why A is correct: Correct. The Practice Standards require the planner to understand the client's personal and financial circumstances and to analyse the current course of action before developing and presenting any recommendation.

Why B is wrong: Tempting because Financial Planning does carry documentation obligations, but there is no rule that a recommendation must be delivered in both forms. The defect here is sequencing, not the medium of delivery.

Why C is wrong: Tempting because following reasonable client directions is genuinely one of the fiduciary duties, but that duty covers lawful directions about the client's affairs. It does not authorise skipping the analytical steps the Practice Standards require.

Why D is wrong: Tempting because a third party is affected by the plan, but the daughter is not the client and no confidential information of hers has been disclosed. Considering a dependant's needs is part of understanding the client's circumstances.

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Exam traps in General Principles of Financial Planning

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

Present the preferred strategy to Priya and obtain her agreement before any further analysis is done.
Why it is wrong: Presenting is tempting because the modelling is finished and the planner has something to show, but presentation is the step that follows development. There is no recommendation to present until the planner has selected and formulated one.
She must carry out both actions herself, because a planner who recommends a product takes on the duty of putting that product in place.
Why it is wrong: It is tempting to tie the recommendation to its execution, but the standard expressly contemplates the client implementing some actions. The planner's responsibility follows the agreed division of work, not the origin of the recommendation.
She is responsible for tracking every change in Reuben's circumstances, because the fiduciary duty continues for the whole of the engagement.
Why it is wrong: The fiduciary duty does continue through the engagement, which makes this plausible, but it does not turn the planner into a monitor of transactions she was never told about and never agreed to watch. Scope is set by agreement.

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