B.7.1 Establishing the Client Relationship

Certified Financial Planner CFP

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1 A. Professional Conduct and Regulation

A.1 Code of Ethics and Standards of Conduct A.1.1 The Six Ethical Principles A.2 Procedural Rules and Discipline A.2.1 Fitness Standards for Candidates A.3 Financial Institutions Overview A.3.1 Broker-Dealers vs. RIAs A.4 SEC and Securities Regulation A.4.1 FINRA and Broker-Dealer Regulation A.4.2 State Securities Regulation A.5 Consumer Protection Laws A.5.1 Privacy and Confidentiality Requirements A.6 Fiduciary Duty and Application

2 B. General Principles of Financial Planning

B.7 The Financial Planning Process B.7.1 Establishing the Client Relationship B.7.2 Gathering Client Data and Goals B.8 Personal Financial Statements B.8.1 Key Financial Ratios B.9 Cash Flow Management B.9.1 Emergency Fund Planning B.10 Debt Management Strategies B.10.1 Mortgage and Home Financing B.11 Economic Concepts B.11.1 Planning for Inflation B.12 Time Value of Money Concepts B.12.1 TVM Calculations and Applications B.12.2 Loan Amortization B.13 Education Needs Analysis B.14 Education Savings Vehicles B.14.1 529 Plans In-Depth B.15 Education Funding Strategies B.16 Gift/Income Tax Strategies

3 C. Risk Management and Insurance Planning

C.17 Principles of Risk and Insurance C.17.1 Risk Management Process C.18 Analysis of Risk Exposures C.19 Health Insurance Fundamentals C.19.1 Types of Health Insurance Plans C.20 Disability Income Insurance C.20.1 Disability Policy Features C.21 Long-Term Care Insurance C.22 Annuities Overview C.22.1 Fixed vs. Variable Annuities C.23 Life Insurance Fundamentals C.23.1 Types of Life Insurance C.24 Business Owner Insurance Solutions C.25 Insurance Needs Analysis C.26 Insurance Policy and Company Selection

4 D. Investment Planning

D.27 Equity Securities D.27.1 Fixed Income Securities D.27.2 Mutual Funds and ETFs D.27.3 Taxation of Investment Vehicles D.28 Systematic Risk D.28.1 Unsystematic Risk D.29 Economic and Market Cycles D.30 Measures of Risk and Return D.30.1 Investment Performance Measures D.31 Asset Allocation Strategies D.31.1 Portfolio Diversification D.32 Bond and Stock Valuation D.32.1 Stock Valuation Models D.33 Investment Policy Statement D.33.1 Modern Portfolio Theory D.34 Active vs. Passive Investing D.34.1 Common Investment Strategies D.35 Alternative Investments D.35.1 Options and Derivatives

5 E. Tax Planning

E.36 Income Tax Fundamentals E.36.1 Filing Status and Tax Brackets E.37 Types of Income E.37.1 Deductions and Credits E.37.2 Capital Gains and Losses E.38 Business Entity Taxation E.38.1 Self-Employment Tax E.39 Taxation of Trusts and Estates E.40 Tax Reduction Strategies E.40.1 Retirement Account Tax Strategies E.41 Property Transactions E.41.1 Basis Rules for Acquired Property E.42 AMT and NIIT E.42.1 Special Tax Situations E.43 Charitable Giving Strategies

6 F. Retirement Savings and Income Planning

F.44 Retirement Needs Analysis F.44.1 Sources of Retirement Income F.45 Social Security Benefits F.45.1 Social Security Claiming Strategies F.45.2 Medicare Planning F.46 Eldercare and Special Needs Planning F.47 Qualified Plan Overview F.47.1 Defined Benefit Pension Plans F.47.2 Defined Contribution Plans F.48 Eligibility and Vesting F.48.1 Coverage and Discrimination Testing F.48.2 Contribution and Benefit Limits F.48.3 401(k) Plan Features F.49 Non-Qualified Deferred Compensation F.49.1 Executive Compensation Plans F.50 Retirement Plan Selection for Businesses F.50.1 Individual Retirement Accounts F.51 Distribution Rules F.51.1 Required Minimum Distributions F.52 Retirement Income Strategies F.52.1 Tax-Efficient Withdrawal Strategies F.53 Business Succession Planning

7 G. Estate Planning

G.54 Property Titling and Beneficiary Designations G.54.1 Beneficiary Designations G.55 Strategies to Transfer Property G.55.1 Lifetime Gifting Strategies G.56 Wills and Estate Documents G.56.1 Powers of Attorney G.56.2 Advance Directives and Healthcare Documents G.57 Federal Gift Tax G.57.1 Federal Estate Tax G.57.2 Generation-Skipping Transfer Tax G.58 Sources for Estate Liquidity G.58.1 Life Insurance for Estate Liquidity G.59 Trust Fundamentals G.59.1 Revocable Living Trusts G.59.2 Irrevocable Trusts G.59.3 Trust Income Taxation G.60 Marital Deduction Planning G.60.1 QTIP Trusts G.60.2 Portability of Estate Tax Exemption G.61 Intra-family and Business Transfer Techniques G.61.1 Family Limited Partnerships G.61.2 GRATs and IDGTs G.62 Postmortem Estate Planning Techniques G.62.1 Disclaimer Planning G.62.2 Estate Tax Elections G.63 Planning for Divorce and Unmarried Couples G.63.1 Estate Planning for Unmarried Couples G.63.2 Planning for Blended Families G.64 Planning for Special Needs and Circumstances G.64.1 Special Needs Trusts G.64.2 ABLE Accounts

8 H. Psychology of Financial Planning

H.65 Client and Planner Attitudes, Values, Biases H.65.1 Money Scripts and Money Attitudes H.65.2 Planner Self-Awareness H.66 Behavioral Finance H.66.1 Cognitive Biases H.66.2 Emotional Biases H.66.3 Heuristics and Mental Accounting H.67 Sources of Money Conflict H.67.1 Couples and Money Conflict H.67.2 Family and Intergenerational Money Conflict H.68 Principles of Counseling H.68.1 Therapeutic Techniques in Financial Planning H.68.2 Professional Boundaries and Referrals H.69 General Principles of Effective Communication H.69.1 Listening and Questioning Skills H.69.2 Managing Difficult Conversations H.69.3 Non-Verbal Communication H.70 Crisis Events with Severe Consequences H.70.1 Death and Divorce H.70.2 Job Loss and Health Crisis H.70.3 Sudden Wealth and Sudden Loss H.70.4 Natural Disasters and Traumatic Events

B.7.1 Establishing the Client Relationship

Key Takeaways Explain This Topic AI

The scope of engagement must be mutually agreed upon and documented before providing financial planning services

Engagement letters serve as the legal contract defining roles, responsibilities, compensation, and duration of the relationship

CFP professionals must disclose all material information including compensation method, conflicts of interest, and firm affiliations

Fee-only planners receive compensation solely from clients; fee-based planners may also receive commissions or other third-party compensation

Last updated: January 2026

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

Element Description Example
Services to be Provided Specific planning areas covered Retirement planning and investment management
Services NOT Provided Areas explicitly excluded Tax preparation, legal advice, insurance sales
Duration Time frame of the engagement One-time plan or ongoing relationship
Responsibilities Who does what Planner analyzes; client provides information
Compensation How the planner will be paid Fee-only, commission-based, or hybrid
Termination How either party can end the relationship Written notice, refund policy
Why the Scope Matters

The scope of engagement serves several critical purposes:

Client Protection : Clients know exactly what to expect and can hold the planner accountable
Planner Protection : Limits liability to agreed-upon services
Regulatory Compliance : Required by CFP Board Standards of Conduct
Professional Standards : Demonstrates thoroughness and professionalism
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

Section Content CFP Board Requirement
Parties Names and contact information Required
Scope of Services What planning services will be provided Required
Client Responsibilities Information client must provide Required
Planner Responsibilities What the CFP professional will do Required
Compensation How, when, and how much the planner is paid Required
Conflicts of Interest Material conflicts and how they're managed Required
Duration and Termination When engagement begins/ends, how to terminate Required
Confidentiality How client information will be protected Best Practice
Limitations What the planner cannot or will not do Best Practice
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

Model Description Potential Conflicts

Fee-Only Compensation comes solely from client fees (hourly, flat, or AUM) Minimal conflicts; may favor higher AUM

Fee-Based Receives client fees AND commissions or other compensation Commission products may be recommended
Commission-Only Compensation from product sales only May favor products with highest commissions
Salary Employed by a firm, paid salary May push firm's proprietary products
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
Services and Products Offered : What you can and cannot provide
Compensation Method : How you get paid, by whom, and how much (or ranges)
Conflicts of Interest : Any situation that could affect objectivity
Relationships with Third Parties : Referral arrangements, affiliations
Regulatory Status : SEC/state registration, broker-dealer affiliation
Disciplinary History : Material legal or regulatory issues
Certifications and Licenses : CFP certification status, securities licenses
Form ADV and Other Required Documents

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

Document Who Provides What It Contains
Form ADV Part 2 SEC/State-registered investment advisers Detailed firm information, fees, conflicts
Form CRS Broker-dealers and investment advisers Client Relationship Summary
Privacy Notice All financial institutions How client information is used/shared
Financial Planning Agreement All CFP professionals Scope and terms of engagement
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:

Number of Elements Affected : How many areas of the client's life are impacted
Portion of Assets Involved : What percentage of the client's wealth is affected
Time Frame : How long the client's circumstances may be impacted
Risk Exposure : Effect on the client's overall exposure to risk
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.