Fiduciary standard and application

The duties of loyalty, care and to follow client instructions; when CFP Board's fiduciary duty attaches (whenever financial advice is given); how it compares with the SEC adviser fiduciary standard, Regulation Best Interest and ERISA fiduciary rules; and identifying a breach in a client scenario.

CFP Board Code of Ethics and Standards of ConductRegulation Best InterestERISA

Practice question for this objective

Free sampleProfessional Conduct and Regulationmedium

Ravi, a CFP professional, is engaged by a new client for one narrow purpose: to review the client's existing disability income policy and advise whether to replace it. No financial planning engagement is agreed, and Ravi bills a flat hourly fee. One of the replacement policies he is considering pays his firm a materially higher commission than the others. Under the CFP Board Code of Ethics and Standards of Conduct, what standard of conduct governs the recommendation Ravi is about to make?

ARavi owes a suitability obligation only, because the engagement is limited to a single insurance product and the client has declined financial planning.
BRavi owes the fiduciary duty only from the point the client accepts the recommendation and the replacement policy is actually placed and paid for.
CRavi owes the fiduciary duty at all times when providing Financial Advice, so the narrow engagement limits the subject matter he must consider but does not reduce the duty he owes on it. Correct
DRavi owes the fiduciary duty only if the client later expands the engagement so that it requires integrated advice across several financial planning subject areas.

The fiduciary duty applies to all Financial Advice, so a narrow engagement limits the subject matter examined but never the standard of conduct owed. Under the Code and Standards the trigger for the fiduciary duty is the act of providing Financial Advice, not the size or formality of the engagement. Because a recommendation to replace a disability policy is a recommendation about an insurance product, it is Financial Advice, and Ravi must act with the duty of loyalty, the duty of care and the duty to follow client instructions. The higher commission is a material conflict he must disclose, obtain informed consent to and manage. Narrowing the engagement removes subject areas from the analysis; it does not convert the obligation into suitability.

Why A is wrong: Tempting because insurance sales outside a planning engagement are often regulated on a suitability basis by state insurance law, but CFP Board sets its own higher bar for a CFP professional, and that bar does not drop to suitability for a narrow engagement.

Why B is wrong: Tempting because the commission is earned at placement, but the duty attaches when the advice is given, not when it is implemented. A recommendation the client rejects was still made under the fiduciary duty.

Why C is correct: Correct. The Code and Standards attach the fiduciary duty, comprising the duties of loyalty, care and following client instructions, to any Financial Advice, and a recommendation to replace an insurance policy is Financial Advice. Scope limits the breadth of the analysis, not the standard applied to it.

Why D is wrong: This confuses two separate tests. Whether the engagement requires integrated advice decides if the Practice Standards for the Financial Planning Process apply. The fiduciary duty applies to Financial Advice regardless of that answer.

See more CFP practice questions, answers explained.

Exam traps in Professional Conduct and Regulation

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.

Regulation Best Interest imposes a continuing duty to monitor every brokerage position, so the absence of quarterly brokerage reviews is a breach that the firm should correct by extending the advisory review cycle to that account.
Why it is wrong: Tempting because the care obligation sounds continuous, but Regulation Best Interest attaches at the time of a recommendation, and any ongoing monitoring obligation arises from an agreement to monitor rather than from the rule itself.
She must avoid the conflict altogether by recommending only unaffiliated programmes, because a CFP professional cannot recommend a product from which the firm earns ongoing revenue.
Why it is wrong: Tempting because avoidance is the cleanest response to a conflict, but the Code and Standards do not prohibit recommending proprietary or affiliated products. They require the conflict to be disclosed, consented to and managed.

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