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Frank C. Bearden, Ph.D., CLU®, ChFC®, is an adjunct professor for graduate degree programs at the College for Financial Planning. He has published articles, given presentations, and conducted qualitative and quantitative research regarding conflicts of interest.
While there are a significant number of articles in the professional press and in professional conversations about conflicts of interest (COI), encountering a conflict of interest may be an unusual experience for many financial planners. For that reason, considering how such a situation might develop may be useful for financial planners in practice. In reviewing situations to consider, CFP Board’s Code of Ethics and Standards of Conduct (www.cfp.net/ethics/code-of-ethics-and-standards-of-conduct) will provide the ethical frame of reference. Let’s consider first what CFP® professionals can do when they are facing the possibility of an engagement involving a COI.
Assess the Engagement
One of the first items a financial planner should consider is what is involved if she or he accepts the engagement. What must the CFP® professional do to comply with CFP Board’s Code of Ethics and Standards of Conduct? To remain in good standing with CFP Board, the CFP® professional should thoroughly disclose the elements of the COI with the client to CFP Board to the Board’s satisfaction, and the financial planner should follow business practices designed to prevent the COI from interfering with the CFP® professional’s ability to act in the client’s best interest.
At this point, a CFP® professional should review the requirements from CFP Board’s Code of Ethics and Standards of Conduct before accepting an engagement with a potential client with whom the financial planner has a COI. The Code of Ethics will allow a CFP® professional to accept an engagement with a prospective client with whom the CFP® professional has a COI, subject to the following requirements:
- Act with honesty, integrity, competence, and diligence.
- Act in the client’s best interests.
- Exercise due care.
- Avoid, or disclose and manage, conflicts of interest. The CFP Board Standards of Conduct adds this provision:
- Disclose and manage conflicts of interest, with thorough descriptions of both requirements.
To fully understand the requirements of CFP Board’s Code of Ethics and Standards of Conduct regarding a conflict of interest, review all content that addresses conflicts of interest. Let’s consider a few examples of how to consider the significant issues.
Accept the Engagement
Mark is a CFP® professional. He and his business associate Wills have equal interest in 25 acres of land currently being considered by a developer for housing. They have asked for $6.25 million. The partners have agreed to maintain an interest in the property after a sale, and Wills would have first right to buy Mark’s share. Wills has informed Mark that he needs to have some financial planning done to assist in managing his investments, as well as a review of his life insurance. He hopes to secure a better rating than his last attempt, and because Mark is insurance licensed, he is sure Mark can accomplish this.
Mark has come to realize that a financial planning engagement with Wills may involve a conflict of interest and consequently has read the pertinent information in CFP Board’s Code of Ethics and Standards of Conduct. However, he has known Wills for several years and has disagreed with him on a number of issues that were successfully resolved. In this light, he decides to proceed with the discussions about Wills and his wife becoming clients and plans to accept the engagement.
But what if Mark decided he was not able nor willing to form an engagement with his friend Wills? What could he do to possibly help Wills without becoming his financial planner? Here are additional options he could consider with the prospective client.
Refer the Prospective Client to Another CFP® Professional
As Mark works in a growing financial planning firm and knows other planners he respects in his city, he could politely refuse the engagement and refer Wills to another CFP® professional. He could explain to Wills that he needs someone who can provide him with quality professional service without any distractions to working in his best interests. He would assure Wills that such an individual had his own respect. If agreeable to Wills, Mark would make the referral.
Refuse the Engagement
Consider now the same situation, except Mark does not know another suitable CFP® professional to refer to, or the prospective client (Wills) does not want a referral. In such a situation, there is no referral possible. In this case, a CFP® professional can still refuse the engagement, and the potential client would have to search for another financial planner. In that situation, the COI would not be operative as far as Mark is concerned.
Closing Considerations When Practicing with a COI
While a financial planner may be committed to the requirements of the Code of Ethics and Standards of Conduct involving the duties to disclose and manage a COI, this process does not guarantee the COI will be completely of no influence upon the CFP® professional. In this case, Mark in our examples should note that even with full compliance with CFP Board’s Code of Ethics and Standards of Conduct, the COI is unlikely to disappear.1 Also, the COI may exert influence even when the financial planner is unaware of the influence.2
Possible Repercussions When Practicing with a COI
In closing, the CFP® professional should consider possible repercussions from the influence of a COI, even if compliant with the stipulations of CFP Board’s Code of Ethics and Standards of Conduct. An oversight in a financial recommendation may occur due to the influence of a COI, which, although not intended, may cause financial loss to a client. Second, if a financial loss occurs due to the oversight, the client may file a lawsuit against the CFP® professional, seeking compensation for the loss. Such occurrences are not likely but can occur if the CFP® professional makes a mistake in judgment due to the influence of a COI.
- See Chugh, Dolly, Max Bazerman, and Mahzarin Banaji. 2005. “Bounded ethicality as a psychological barrier to recognizing conflicts of interest.” In Conflicts of Interest: Challenges and Solutions in Business, Law, Medicine, and Public Policy, eds. Don Moore, Daylian Cain, George Lowenstein, and Max Bazerman (Cambridge: Cambridge University Press, 2005.)
- See Davis, Michael. 2001. “Introduction.” In Conflict of Interest in the Professions, eds. Michael Davis and Andrew Stark (Oxford: Oxford University Press, 2001); and Ishaque, Marie. 2021. “Managing conflict of interests in professional accounting firms: A research synthesis.” Journal of Business Ethics 169 (3): 537–555.