Competent: The transition from entry-level to competent status in the financial planning profession tends to be relatively quick. This is the result of increasing state and federal regulation of the financial services marketplace and an amplified attention by firms to educate their employees on regulation compliance. Many proficient financial planners hold the Series 6, Series 7, or Series 63 and 65 licenses, depending on the services provided. One who provides services for a fee should also be registered either as an investment adviser or as an investment advisor representative. Generally, planners who manage for a fee less than $100 million in client assets must register at the state level.
Expert: An expert commission-based or fee-based financial planner will additionally hold a Series 24 General Securities Principal license. This license verifies that the financial planner fully understands and can interpret and enforce all FINRA regulations, brokerage firm operations, and other supervisory requirements. In other words, a Series 24 license allows an individual to supervise and manage brokerage firm operations. An expert financial planner who is compensated by way of client fees holds a Series 65 license or a combination of Series 66 and 7 licenses,34 or is currently certified as a CFP professional.35
IN PRACTICE
Shaylea Mueller is a new financial planning graduate. She just received a job offer from a large financial planning company that requires Shaylea to pass a series of examinations before meeting with clients. Shaylea has researched the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) websites to learn more about the examinations she may need to take. As a registered representative, Shaylea has learned that she is subject to suitability standards and will be required to pass a series of FINRA examinations. Specifically, Shaylea is required to take the FINRA Series 7 and 65 examinations in order to sell most of the investment products offered by her firm. Now that Shaylea has a job, her employer is able to sponsor her to take these examinations.
Jorge recently joined a financial planning firm. His primary responsibility involves meeting with employees of large firms to promote participation in each firm’s defined contribution plan, in which Jorge’s planning firm manages accounts. Jorge receives a base salary and a commission based on the total value of assets contributed by a firm’s employees. It is possible for Jorge to generate well over $100,000 per year in commission income. Recently, a newly hired employee asked Jorge how he was paid. Jorge told the employee that he earns a salary from his planning firm. He also noted that the new employee would not be responsible for paying any other fees other than ongoing fund management expenses. Six months later, Jorge received a reprimand from regulators based on the level of disclosures made to the new employee. By suggesting that he was only paid a salary, Jorge was found to have misrepresented his compensation method. Under fiduciary rules, Jorge should have disclosed the commission portion of his compensation when asked.
NOTES
Visit www.wiley.com/go/wileycfpboard2e to access nearly 400 practice questions. Your access code is at the back of this book. CFP® professionals in the United States can also choose to obtain the full 28 credit hours by taking and passing the test.
CHAPTER 4
Consumer Protection Laws
CONNECTIONS DIAGRAM
Consumer protection laws, a combination of federal, state, and local regulations, impact every aspect of financial planning. These laws, in conjunction with the work of consumer advocacy groups, exist to empower consumers in the marketplace. Policies and rules also help guide how financial planning is delivered either as a service or as a product at the household level. Each law provides consumers with legal protections to combat fraud, misrepresentation, discrimination, and illegal behavior on the part of producers and service providers. When combined, these laws, rules, and regulations work to provide a safety net of consumer finance protection.
INTRODUCTION
The United States has a long and lively history related to consumerism, which is defined as the notion that goods and services help explain the role of individuals in society.36 At the outset of the Industrial Revolution, interactions between producers and consumers were dictated by the concept of caveat emptor, which means “may the buyer beware.” Problems associated with a marketplace in which consumers undertake non-regulated risks when making financial products and other financial decisions include lack of choice, lack of information, lack of redress to resolve grievances, and lack of representation. According to Garman, consumer protection laws have been systematically enacted as a way to protect and secure the following consumer rights:37
LEARNING OBJECTIVE
The student will be able to:
a. Describe consumer laws that impact clients, including bankruptcy, banking, credit, privacy regulations, and other relevant laws.
A key element associated with the practice of financial planning involves providing advice in the consumer interest. Consumer protection laws provide a framework for nearly all client–planner interactions. Some laws dictate what actions may be appropriate, whereas other regulations provide a means of redress for consumers. The ability to discriminate between and among appropriate and problematic advice, policies, and projected client outcomes, using consumer protection laws as a guide, is an essential planning skill. In addition to understanding the role of consumerism in the United States and laws associated with protecting the consumer interest, it is also important for financial planners to have a working knowledge of relevant laws that can impact how a client interacts in the marketplace, such as the six legal forms of bankruptcy, as shown in Table 4.1. Privacy rules are also important. Consider the Health Insurance Portability and Accountability Act of 1996 (HIPAA) rules that protect individual medical records and personal health information.38 More broadly, Federal Trade Commission rules, under the Gramm-Leach-Bliley Act, have a direct impact on the day-to-day practice of financial planning. These privacy rules require any financial institution that provides services to consumers to disclose firm policies on the dissemination of non-public information to third parties. Custodians must adhere to these rules, and therefore financial planners should also consider establishing their own client privacy guidelines and annually disclosing this information to clients. As is the case with other aspects of consumer regulation, these examples highlight only a few of the relevant laws financial planners must consider when working with clients.
Related Content Areas Associated with the Learning Objective
■ Financial planners must have both theoretical and applied knowledge of financial and consumer regulations.
■ This learning objective is associated with knowledge about regulations of financial institutions, financial services laws, and general legal and ethical requirements for financial planners.
Table 4.1 United States Bankruptcy Laws
IN CLASS
*Appropriate for on-campus course.
** Appropriate for both on-campus and distance courses.
PROFESSIONAL PRACTICE