Establishing the Client-Planner Relationship

Before any financial planning services can be provided, CFP professionals must properly establish the client relationship. This critical step ensures both parties understand the nature, scope, and terms of their engagement. Skipping or inadequately completing this step can lead to misunderstandings, ethical violations, and potential liability.

The Scope of Engagement

The scope of engagement defines what services the CFP professional will and will not provide. It is a mutual agreement between the planner and client that must be established before any planning work begins.

Key Elements of the Scope of Engagement

Why the Scope Matters

The scope of engagement serves several critical purposes:

1. Client Protection: Clients know exactly what to expect and can hold the planner accountable
2. Planner Protection: Limits liability to agreed-upon services
3. Regulatory Compliance: Required by CFP Board Standards of Conduct
4. Professional Standards: Demonstrates thoroughness and professionalism
5. Conflict Prevention: Reduces misunderstandings about deliverables

Exam Tip: If a CFP professional cannot obtain sufficient information to provide comprehensive planning within the agreed scope, they must either narrow the scope of engagement or terminate the relationship.

Limited Scope vs. Comprehensive Engagement

CFP professionals may offer different levels of service:

Limited Scope Engagement:

• Focuses on specific planning areas (e.g., only retirement planning)
• May be appropriate for clients with focused needs
• Still requires documentation and disclosure
• CFP professional remains responsible for all steps within the limited scope

Comprehensive Financial Planning:

• Addresses all relevant elements of the client's circumstances
• Integrates multiple planning areas
• Requires full seven-step process
• Generally appropriate when decisions affect multiple areas of the financial plan

The Engagement Letter

An engagement letter (also called a financial planning agreement or client service agreement) is the formal written document that establishes the client-planner relationship. It transforms the scope of engagement into a binding agreement.

Required Elements of an Engagement Letter

Sample Engagement Letter Language

Here is an example of key provisions in an engagement letter:

Scope of Services: "We will provide comprehensive financial planning services including retirement planning, investment analysis, risk management review, and estate planning coordination. We will NOT provide tax preparation, legal document drafting, or insurance policy sales."

Compensation: "Our firm charges a flat fee of $3,000 for comprehensive financial plan development, payable 50% upon signing this agreement and 50% upon plan delivery. Ongoing monitoring services are billed at $250 per month."

Client Responsibilities: "The Client agrees to provide accurate and complete information regarding their financial situation, inform us of any material changes in circumstances, and review all recommendations before implementation."

Exam Tip: The engagement letter must be established before providing financial planning services, not after the planning process has begun.

Compensation Disclosure

One of the most critical aspects of establishing the client relationship is clear disclosure of how the CFP professional will be compensated. The CFP Board requires full transparency about compensation arrangements.

Types of Compensation Models

Fee-Only vs. Fee-Based: A Critical Distinction

Fee-Only CFP professionals:

• Receive ALL compensation directly from clients
• Do not receive commissions, referral fees, or third-party payments
• Generally viewed as having fewer conflicts of interest
• Cannot use the term if they receive ANY third-party compensation

Fee-Based CFP professionals:

• Receive fees from clients AND other compensation sources
• May receive commissions on insurance or investment product sales
• Must disclose all compensation sources
• Subject to more potential conflicts of interest

Exam Tip: The CFP Board's Code of Ethics requires disclosure of ALL material compensation sources. A "fee-based" planner who describes themselves as "fee-only" is violating the Code.

Disclosure Requirements

CFP professionals must provide clients with specific disclosures, either before or at the time the client engages their services:

Material Disclosures Required

1. Services and Products Offered: What you can and cannot provide
2. Compensation Method: How you get paid, by whom, and how much (or ranges)
3. Conflicts of Interest: Any situation that could affect objectivity
4. Relationships with Third Parties: Referral arrangements, affiliations
5. Regulatory Status: SEC/state registration, broker-dealer affiliation
6. Disciplinary History: Material legal or regulatory issues
7. Certifications and Licenses: CFP certification status, securities licenses

Form ADV and Other Required Documents

Depending on regulatory registration, CFP professionals may need to provide:

Client Responsibilities

The engagement letter should clearly outline what the client is expected to do:

Information Provision:

• Provide accurate and complete financial information
• Disclose relevant personal circumstances affecting financial decisions
• Share copies of key documents (tax returns, account statements, insurance policies)
• Update the planner when circumstances change

Communication:

• Respond to requests for information in a timely manner
• Review materials provided by the planner
• Ask questions when something is unclear
• Provide feedback on preferences and concerns

Decision-Making:

• Make final decisions on all recommendations
• Take responsibility for accepting or rejecting advice
• Implement agreed-upon strategies
• Monitor own progress and report back as needed

Terminating the Relationship

Either party should be able to terminate the relationship, and the engagement letter should specify:

• Notice Requirements: How much advance notice is required (typically 30 days)
• Reason Requirement: Whether a reason must be given (usually not required)
• Fee Adjustments: Refunds for prepaid fees, pro-rata billing
• Document Retention: How long records will be kept, client access
• Transition Assistance: Help moving to a new adviser if requested

When Financial Planning Applies

The CFP Board uses several integration factors to determine when a financial planning engagement exists:

1. Number of Elements Affected: How many areas of the client's life are impacted
2. Portion of Assets Involved: What percentage of the client's wealth is affected
3. Time Frame: How long the client's circumstances may be impacted
4. Risk Exposure: Effect on the client's overall exposure to risk
5. Barriers to Modification: Difficulty or cost of changing course (surrender charges, penalties)

When these factors indicate significant integration across multiple planning areas, the full seven-step financial planning process applies, and a comprehensive engagement must be established.