Professional Conduct and Regulation

A Crypto Review of the CFP® Curriculum

Onramp INVEST

January 24, 2022

With the number of cryptoasset investors growing daily, we believe it is no longer acceptable under the CFP® Code of Ethics to ignore our clients’ cryptoassets and failing to give clients advice about their cryptoassets could be considered a breach of fiduciary duty. A theme in this document is that, while regulations around cryptoassets are constantly changing, it is the advisor’s duty to act with “care, skill, prudence, and diligence” with cryptoassets. Many advisors will require a new educational foundation on cryptoassets in order to get up to speed and comply with fiduciary duty and the CFP® Code of Ethics.

CFP® Code of Ethics:

  1. Act with honesty, integrity, competence, and diligence
  2. Act in the client’s best interests
  3. Exercise due care
  4. Avoid or disclose and manage conflicts of interest
  5. Maintain the confidentiality and protect the privacy of client information
  6. Act in a manner that reflects positively on the financial planning profession and CFP certification

In regards to the CFP® Code of Ethics, advisors should treat cryptoassets as they would any other asset class. This starts with #1 and #2 above: exercising competence and diligence, while acting in the client’s best interests.

Let’s take a look at a few specific sections of the Standards of Conduct:

Fiduciary Duty

The CFP® Standards of Conduct states that “At all times when providing financial advice to a client, a CFP® must act as a fiduciary, and therefore, act in the best interests of the client.”

The following duties must be fulfilled:

  1. Duty of Loyalty – Placing the interests of the client above the interests of the CFP® professional and the CFP® professional’s firm.
  2. Duty of Care – Acting with care, skill, prudence, and diligence that a prudent professional would exercise in light of the client’s goals, risk tolerance, objectives, and financial and personal circumstances.
  3. Duty to Follow Client Instructions – Comply with all objectives, policies, restrictions, and other terms of the engagement and all reasonable and lawful directions of the client.

In order to comply with the Duty of Care, advisors must maintain an appropriate level of neutrality to new asset classes such as crypto. They cannot let their own personal biases, both positive and negative, get in the way of providing advice that is in the best interest of their clients. This starts with advisors educating themselves as well as their clients on cryptoassets. Advisors have the responsibility to view each client’s situation on an independent basis, taking a detailed look at the client’s goals, risk tolerance, objectives, and circumstances, to determine if an allocation to cryptoassets is appropriate. Given the volatility of the asset class, a cryptoasset allocation will likely not make sense for every client at this time. The only way to determine this is by having the educational background on cryptoassets before coming to a conclusion on what is in the “best interest” of the client.

Competence

The CFP® board states: “A CFP® professional must provide professional services with competence, which means with relevant knowledge and skill to apply that knowledge. When the CFP® professional is not sufficiently competent in a particular area to provide the professional services required under the engagement, the CFP® professional must gain competence, obtain the assistance of a competent professional, limit or terminate the engagement, and/or refer the client to a competent professional.”

If an advisor has not taken the steps to become competent and educated on cryptoassets, they should not be describing the asset class to the client.

Diligence

If a client inquires about cryptoassets for their portfolio, the CFP® professional must provide professional services and respond in a timely and thorough manner. If cryptoassets are outside the scope of the CFP® professional’s competence, they should be obtaining assistance, limiting the engagement, or referring the client to a competent professional.

Providing Information to a Client

Advisors should be aware that when providing financial advice on cryptoassets, updates may be needed to the information advisors are providing clients. According to the CFP® board, prior to the time of engagement, the following information must be provided to the client:

  1. A description of the services and products to be provided
  2. How the client pays for the products and services, and a description of the additional types of costs that the client may incur, including product management fees, surrender charges, and sales loads
  3. How the CFP® professional, the CFP® professional’s firm, and any related party are compensated for providing the products and services
  4. The existence of any public discipline or bankruptcy
  5. Conflict of interest disclosure
  6. Written notice regarding non-public personal information
  7. Disclosure of Economic Benefit for referral or engagement of additional persons
  8. Any other information that is material to a client’s decision to engage or continue to engage the CFP® professional or the CFP® professional’s firm.

With respect to cryptoassets, items 1, 2, 3, and 5 would likely need to be updated. Advisors will need to be thorough in their explanation of costs associated with cryptoasset transactions and management of cryptoassets on a discretionary basis.

Duties When Selecting, Using, and Recommending Technology

A CFP® professional must exercise reasonable care and judgment when selecting, using, or recommending any software, digital advice tool, or other technology while providing professional services to a client. The CFP® professional must have a reasonable level of understanding of the assumptions and outcomes of the technology employed. The CFP® professional must also have a reasonable basis for believing that the technology produces reliable, objective, and appropriate outcomes.

Cryptoasset technology solutions fall under this category. Advisors should take appropriate steps to ensure that the technology is fulfilling the above requirements.

Understanding the Client’s Personal and Financial Circumstances

Under the Practice Standards for the Financial Planning Process outlined by the CFP® Board, a CFP® professional must describe to the client the qualitative and quantitative information concerning the Client’s personal and financial circumstances needed to fulfill the scope of engagement and collaborate with the client to obtain the information.

Examples of qualitative or subjective information include the client’s health, life expectancy, family circumstances, values, attitudes, expectations, earnings potential, risk tolerance, goals, needs, priorities, and current course of action.

Examples of quantitative or objective information include the client’s age, dependents, other professional advisors, income, expenses, cash flow, savings, assets, liabilities, available resources, liquidity, taxes, employee benefits, government benefits, insurance coverage, estate plans, educations and retirement accounts and benefits, and capacity for risk.

Cryptoassets fall into both of these categories. As with any asset class, the advisor must understand a client’s risk tolerance, goals, and priorities, to ensure the investment is adequate for the client’s unique needs. Additionally, it is very important that advisors understand the full scope of the client’s financial situation, including their cryptoasset holdings. Having access to this information could have substantial effects on the client;s liquidity situation, tax planning, capacity for risk, and more.

Identifying and Selecting Goals

A CFP® professional must discuss with the client the CFP® professional’s assessment of the client’s financial and personal circumstances, and help the client identify goals. This includes discussing reasonable assumptions and estimates included in the financial plan such as investment returns, tax rates, and other material assumptions and estimates.

Given the relative age of cryptoassets as an asset class, advisors will likely remain conservative on cryptoasset return and volatility assumptions within their client’s financial plans. Outlining the reasoning behind cryptoasset return estimates will be crucial. Furthermore, having open discussions with clients regarding these assumptions is recommended.

Today, we are pleased to announce that our full review is available for all Onramp Academy users. The intent of the report is to provide financial advisors with a resource to compare their current credentials with the potential credential curriculum of the future. In addition, we will be sending this report to the CFP® for further discussion at their discretion.

The report is 55 pages in length and includes cryptoasset commentary on each of the eight sections of the CFP® exam (including the newly minted Psychology of Financial Planning section). In our opinion, it’s a must-read for every financial professional as the space evolves in the digital realm.

If you are not an Academy member, use the form below and we will email you the report.

As always, educate before you allocate!

With gratitude,
Your Onramp family

 

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