The 7-Step Financial Planning Process: How Advisors Can Adapt for Compliance
The CFP Board’s new Code of Ethics and Standards of Conduct
went into effect on October 1, 2019. This comprehensive update to the Practice
Standards, the most recent to address the delivery of financial planning
services since 2007, focuses on ethical responsibilities in developing,
presenting, and implementing recommendations.
CFP® professionals and advisory firms must understand when
adherence to the seven steps is required, what’s new in the financial planning
process, and how this provides an opportunity to best serve their clients.
When CFP® Professionals Must Comply with the New Seven Step Financial Planning Process
All the steps in Section C: Practice Standards for the
Financial Planning Process got an overhaul to incorporate specific ethical
standards into the client services workflow. Most significantly, these changes
include the addition of a seventh step to the formerly six-step process. This
change reflects the CFP Board’s vision for how advisors need to interact with
clients in order to serve their best interests. It also reflects the reality
that technology is used in all phases of the client relationship. Complying
with the new seven step financial planning process is most easily done with
robust planning technology.
Advisors must comply with these enhanced standards by June
30, 2020, when the CFP Board begins enforcement of the new rules. That requires
a solid understanding of the changes in order to adapt as necessary to be in
compliance with the new Code and Standards. In particular, advisors need to
know about fundamental changes to the code that affect the entire firm.
The seven steps include:
- Understanding the Client’s Personal and Financial Circumstances
- Identifying and Selecting Goals
- Analyzing the Client’s Current Course of Action and Potential Alternative Courses of Action
- Developing the Financial Planning Recommendation(s)
- Presenting the Financial Planning Recommendation(s)
- Implementing the Financial Planning Recommendation(s)
- Monitoring Progress and Updating
The CFP Board requires compliance with these standards under
three distinct circumstances. The first is when you agree to provide, or
provide financial planning, under a written client engagement agreement.
The second situation is when, to act in the Client’s best interests,
you agree to provide, or do provide financial advice based on your client’s
personal or financial circumstances. Even if you’re not providing formal
financial planning, your financial advice might be necessary to honor your
In the third case, you’re beholden to the new Codes and
Standards when your client reasonably believes you will provide, or have
provided financial planning. Anybody who markets themselves as a CFP®
professional will be responsible for adhering to the new Code and Standards.
A More Holistic Approach to Financial Planning
One of the most significant changes in the CFP Board’s
financial planning process outlines the way in which advisors must take a
holistic approach to advice. There are changes to all steps in the new
standards to incorporate consideration of all of a client’s financial goals,
even if an advisor doesn’t handle every aspect of their financial lives.
The CFP Board revised the original first two steps in the
planning process, “Establishing and Defining the Relationship with the
Client,” and “Gathering Client Data,” and replaced them with
steps focusing less on the data and more on the client’s overall financial
goals. This encourages advisors to provide more valuable advice to clients
through deeper conversations.
Whoever is responsible for onboarding clients and gathering
data now has a responsibility to ask clients about their high-level financial
goals, regardless of whether they’re directly managing the relevant assets.
Clients must understand how plan recommendations can best serve them in
achieving their overall goals.
The CFP Board emphasized this holistic approach because it
wants advisors to focus on data gathering and goals conversations with
precision, from the outset of financial planning. Their objective is to make
certain advisors get a full view of the client’s goals so that clients aren’t
receiving advice that isn’t in their best interest.
That means asking clients questions about all aspects of
their finances to make sure their financial and life goals fit into a suggested
strategy. For some advisors, this may require a shift in mindset when
establishing relationships with clients. The conversation now must incorporate
much broader topics than ever before.
Ethical Responsibility at All Client Touch Points
The other fundamental change to the new Code and Standards
is the separation between building and presenting plans. Technically, CFP®
professionals are the firm professionals who must comply with the CFP Board’s
regulations. But the new Code and Standards hold the firm itself accountable
for compliance. This means firms need to ensure everyone involved in a client’s
financial planning workflow operates under the same guidelines as CFP®
The CFP Board made this change because they recognize
everyone in a firm may play a different role in the client engagement. One
person might conduct financial plan development while someone else may be
presenting the plan. Or the firm might separate the responsibility of gathering
client data. If, for example, the person developing a financial plan is in
compliance, but the person gathering client data doesn’t ask the right
questions, the entire firm is not in compliance.
Steps 4, 5, and 6 of the new financial planning process outline
precisely how advisors must develop, present, and implement financial plans,
respectively. To follow these steps, firms need to place a higher emphasis on
risk management, as well as explicitly documenting the planning process to
clearly outline individual responsibilities.
The new financial planning process reflects the reality that
in today’s advisory firms, the roles and responsibilities of planning are often
segmented. That makes it imperative that everyone in the firm who is involved
in client financial plan creation understand and comply with all seven steps of
the new Code and Standards.
Establishing Deeper, More Valuable Client Relationships
For some time now, the industry has been turning to
financial planning to gain wallet share, build relationships, and better serve
The CFP Board’s new seven-step process for financial
planning continues to push advisors and firms in this direction, putting in
place even more guidelines for advice that is in the best interest of clients.
To comply with the new financial planning process, firms
need to put their client’s overall goals above all else. Working with clients
to achieve what they truly want in life will keep firms in alignment with the
CFP Board’s mandates on how financial planning should be conducted. It will
also help advisors develop stronger relationships and provide more value to
clients—two things that can help firms achieve their own goals for growth.
Technology plays a big role in achieving compliance with the seven steps of financial planning. Learn more about eMoney financial planning solutions to see how you can more easily comply with the CFP Board’s seven-step financial planning process.