FPSC’s new practice standards clearly define financial planning

(October 6, 2003) The Financial Planners Standards Council (FPSC) is including a straightforward definition of financial planning as part of a draft practice standards document which has just been released for comment. It’s an attempt to differentiate between financial planning and advice, says the FPSC, the organization responsible for administering the CFP designation in Canada.

“To create a document that ensures uniformity and consistency, we’ve had to include a clear definition of financial planning,” says Cary List, the FPSC’s vice-president of standards and certification. “This is the first time in Canada that planning as a professional practice is clearly defined in such a way that distinguishes it from other forms of financial advice.”

The FPSC’s definition of financial planning reads as follows: “The process of creating strategies, considering all relevant aspects of a client’s financial situation, to manage financial affairs to meet life goals.”

Nothing controversial in that, but List says some CFPs may find it tricky to separate planning from advice, since many planners offer other financial services as part of their business, such as selling stocks or insurance products.

As an example, List points to a CFP who is also registered as an investment advisor or broker. “An investment advisor has certain know-your-client obligations, such as understanding the client’s risk tolerance and time horizon,” he says. “Based on that, they would recommend certain investments. That’s investment advice, and there’s nothing wrong with it, but it’s not financial planning.”

In such cases, CFPs would be required to disclose to clients that in those situations, they are not engaged in financial planning. “That’s a huge step in clarifying to the public the difference between financial planning and other forms of financial advice,” List says.

The practice standards do not contain any new ethical or professional obligations for CFP holders. But they do expand on concepts already included in the CFP’s Code of Ethics and Six-Step Financial Planning Process.

For instance, as part of the first step in the planning process, the practice standards document would require planners and clients to sign a letter of engagement, detailing both parties’ responsibilities, the time frame of the engagement, compensation and potential conflicts of interest.

“We’ve always had the six-step process that people subscribe to,” says List, “but these practice standards take the concept of the financial planning process and apply the code of ethics to the practice of financial planning.”

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List says the practice standards are an attempt to evolve financial planning and ensure it’s recognized as a legitimate profession. “If you go to a medical doctor, whether you’re in Vancouver, Calgary or Toronto, or whether you’re going to a walk-in clinic or a family practitioner, you expect the same methodologies to be followed and you expect the same type of service,” he explains. “That’s what defines a professional and you can’t do that without standards of practice. So it really is the next logical step for us.”

The FPSC is also redesigning its disciplinary rules currently included in the code of ethics to ensure that they also incorporate the new practice standards. The two will be treated as a package in terms of a CFP’s obligations, List says. “If something was really a glaring default of their obligations under the practice standards, there could be disciplinary action, anything from a slap on the wrist to a suspension of licence.”

Comments on the practice standards from CFPs and industry participants will be accepted until October 31, 2004. The final document is expected to be released in January 2005.

The new standards will be unveiled Tuesday morning at a breakfast event in Toronto. They’re also available on the FPSC’s Web site.

To comment directly to the FPSC on these standards, please click here.

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What do you think of the FPSC’s definition of financial planning? What do you like or don’t like about the new standards? Share your thoughts and opinions about the new practice standards for CFPs in the Talvest Town Hall on Advisor.ca.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca

(10/06/03)

Doug Watt