CFP Professional Competency Examination flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Fiduciary duty of loyalty

A duty to place the client's interests ahead of the planner's own and to avoid or fully manage conflicts of interest rather than merely tolerating them.

Fiduciary duty of care

A duty to act with the competence, diligence, and reasonable basis expected of a professional, including adequate analysis before making any recommendation to a client.

Informed consent elements

Capacity to decide, adequate disclosure of material risks and alternatives, voluntariness free of coercion, and documented evidence that the client agreed to proceed.

Scope of engagement

A written statement of services included and excluded, fee structure, engagement term, termination terms, and each party's responsibilities in the relationship.

Confidentiality exceptions

Disclosure of client information is permitted when legally compelled, authorized by the client, necessary to defend against a claim, or required to prevent serious harm.

Material conflict disclosure

A written statement identifying the conflict, its nature and magnitude, and how it is managed, delivered before or at the time of the engagement.

Competence boundary rule

When a matter exceeds the planner's expertise, the planner must refer, collaborate with a qualified professional, or decline rather than proceed without adequate basis.

Financial planning process cycle

Seven recurring steps: establish the relationship, gather data and goals, analyze the situation, develop recommendations, present them, implement, then monitor and update.

Suitability versus fiduciary

Suitability permits recommendations merely consistent with a client's profile; fiduciary requires advice that is in the client's best interest after weighing costs and alternatives.

Three elements of competency

Technical knowledge of the subject matter, practical skill in applying it to real client facts, and judgment to recognize when a situation exceeds one's expertise.

Continuing education requirement

A recurring cycle of required education hours, including a minimum ethics portion, intended to maintain currency; exact hours and cycle length vary by certifying body.

Supervisory responsibility

Liability that attaches to anyone who reviews, approves, or directs another's work, and can arise independently of the underlying error being supervised.

Documentation standard

A record of facts gathered, alternatives considered, rationale for recommendations, client decisions, and scheduled follow-up, sufficient for a third party to reconstruct the reasoning.

Personal capacity limits

Constraints such as time, licensing, or product access that restrict the advice a planner can offer and must be disclosed when they affect the client.

Outside-conduct standard

Professional standards extend to conduct outside client engagements when it bears on fitness to practice, including fraud, dishonesty, and misuse of client information.

Referral disclosure

Disclosure of any compensation received for a referral and a reasonable basis for believing the referred professional is competent to handle the matter.

Principal-agent problem

A conflict arising when an agent's incentives diverge from the principal's interests, requiring alignment through disclosure, compensation design, or monitoring.

Best interest cost analysis

Cost must be weighed along with reasonably available alternatives, product features, and client objectives; the cheapest option is not automatically required.

Conflict management sequence

Identify the conflict, then avoid, mitigate, or disclose it; disclosure is the weakest remedy when the conflict actually skews the recommendation.

Risk tolerance versus capacity

Risk tolerance is psychological willingness to accept volatility; capacity for loss is the financial ability to absorb it, and conflating the two produces unsuitable allocations.

Reasonably available alternatives

Options a planner should compare before recommending, including lower-cost share classes, index products, other providers, and taking no action at all.

Rollover recommendation analysis

Comparison of fees, services, investment options, creditor protections, and required minimum distribution rules between the existing plan and the proposed account.

Annuity suitability factors

Surrender charges, guaranteed versus projected values, liquidity needs, cost structure, and the client's time horizon must be analyzed before recommending an annuity contract.

Diminished capacity protocol

Document observations, involve trusted contacts consistent with prior authorization, and refer for formal evaluation when a client's decision-making ability appears impaired.

Monitoring obligation

Ongoing review of the plan and investments is part of best interest advice when the engagement includes it; if excluded, the scope must say so.

Anti-money-laundering program

A written policy with a designated compliance officer, ongoing staff training, and independent testing, plus reporting of suspicious activity to the financial intelligence unit.

Know-your-customer rule

Verification of client identity, understanding of source of funds, and ongoing monitoring of the relationship throughout its duration.

Privacy notice requirement

An initial privacy notice at relationship inception, annual notice where applicable, an opt-out for certain sharing, and safeguards for nonpublic personal information.

Record retention rule

Client communications and recommendation records must be kept per the applicable regulator's schedule; the exact retention period varies by jurisdiction and rule set.

Advertising restrictions

Marketing rules limit testimonials, prohibit guarantees of investment performance, and bar misleading use of professional titles; the governing rule set depends on the planner's registration.

Licensing trigger

Providing investment or financial advice for compensation generally triggers a registration or licensing requirement, determined by the activity and the jurisdiction.

Information security program

Written safeguards including access controls, vendor oversight, employee training, and a breach notification procedure for compromised client data.