Financial planning is the comprehensive process of determining how clients can meet their goals through the management of their financial resources. It may encompass some or all of budgeting and planning; investments; insurance; tax; educational expenses; risk management; succession planning; retirement; estate planning and estate management.
Merely picking a mutual fund, a stock, or an insurance provider is not financial planning. If a professional financial advisor or planner specifically does not offer planning services or specifically excludes planning services from their engagement with you, then the absence of a financial plan is not the professional financial advisor or planner’s responsibility. On the other hand, almost all professional financial advisors and planners in their sales materials and reporting materials offer financial planning and few ever contract out of this representation.
In hindsight, many clients are faced with a stark realization. While they had been promised a “financial plan” by their professional financial advisor and planners, no apparent planning process was undertaken. Furthermore, no financial plan was ever presented. All that was delivered was fancy terms, calming words and promises that the client’s interests were being taken care of.
Baby Boomers and retirees do not seek out professional financial advisors and planners without the desire to hire professionals to take care of their financial investments. Their needs requires planning. For this planning, the professional financial advisors and planners are paid handsomely. Baby Boomers and retirees are not the professionals. They rely on the professionals’ Process Guarantee that a plan is well in hand. When the bottom falls out of the market and it is apparent that no plan was ever in place, the client has a right to seek financial compensation.
Technical Obligations @ Planning
If you sought advice from a “stockbroker”, a professional financial advisor or planners associated with an Investment Dealers Association (”IDA”) Member, then your advisors and planners were required by By-law 39 (Principal and Agent) and Member Regulation 0239 (Principal/Agent Relationships and Financial Planning) to conduct all financial planning business through the IDA Member. MR 0239 says:
The Association has concluded that financial planning is a securities-related business in that the nature and extent of any investment recommendations to a client are inextricably tied to the overall plan. While it is possible for financial plans to generate no investment recommendations, such plans are likely to prove the exception rather than the rule.
Members are therefore responsible for the supervision of the financial planning activities of their agents and employees and the attendant record keeping.
Furthermore, the representative is required to adhere to Rule 2900 (Proficiency and Education). That means that the IDA Member was both responsible for ensuring that plans are compliant with acceptable standards and that the IDA Members are financially responsible for compensating clients if they suffer a loss as a result of planning negligence.
If you sought advice from a mutual fund advisor or planner associated with a Mutual Fund Dealers Association (”MFDA”) member, then your advisor or planner was required by Rule 1.2.1(d) to either provide their services through the MFDA member or clearly indicate an accepted alternative. One way or another, the MFDA based professional financial advisor and planner is required to adhere to established and substantial standards. In MR-0069 the MFDA confirmed the members’ duty to establish a suitability framework to comply with their obligation to ensure each order accepted or recommendation made is in keeping with clients’ Know Your Client (”KYC”) information.
MFDA Rule 2.2.1 requires Members and their Approved Persons (”APs”) to:
…use due diligence to ensure that “each order accepted or recommendation made for any account of a client is suitable for the client and in keeping with the client’s investment objectives“. In order to meet this obligation, Members and APs must obtain and maintain complete, timely and accurate KYC information. Without this information, a determination cannot be made as to whether a recommendation is suitable for a client. Accordingly, Members are required to obtain complete KYC information when opening an account and before trading on behalf of clients.
So too, MR0-0048 requires Members and Approved Persons to:
…ensure that each order accepted or recommendation made for any account of a client is suitable for the client and in keeping with the client’s investment objectives. Know-your-client requirements are a fundamental part of meeting basic suitability obligations. However, these obligations can only be properly discharged if Approved Persons and supervisory staff of the Member also fully understand the products that are being recommended to clients…
It is critical that the Member develops an understanding of all features of the product. Issues such as liquidity of the product and the nature of any underlying investments and their inherent risks must be examined before assigning a risk ranking to the product. The Member should develop guidelines or an investor profile for which the product would be generally suitable, incuding risk levels, time horizon, income and net worth. The Member should also clearly identify investors for whom the product is not suitable. Concentration limits should be assigned to products and/or general classes of products where appropriate.