What is a financial planning letter of commitment? | Financial advisers

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Working with a money professional takes more than just handing over your files to a financial advisor with a Midas twist. Rather, the relationship between a financial advisor and you, the client, is a symbiotic relationship based on accountability, transparency and trust.

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Finding an advisor you like is one thing. Working with this person to achieve your financial goals requires a clear agreement that outlines the roles, responsibilities, and expectations of you and the advisor. This is where the letter of commitment comes in.

Clients may receive a letter of engagement from a professional who provides financial planning services or financial advice. The professional can be a certified financial planner, called a CFP, or another financial expert with whom he works directly.

Here’s what customers need to know about signing a letter of commitment.

What is a letter of commitment?

The Financial Planning Letter of Commitment is a written, legally binding contract that describes, in clear terms, the business relationship between the client and the financial planner. It defines the expectations of the partnership. This is a brief but precise summary of the scope of the relationship, its terms, and how the advisor will be financially compensated for their services.

“Financial planning is such a comprehensive process that clients need to understand what their expectations are for their involvement, as well as the expectations for the advisor’s involvement,” says Katie Burke, CFP and founder of Method Financial Planning, based at outside of Philadelphia.

How the process works

After you have had your first meeting with a financial advisor to discuss your goals and objectives, as well as the services the professional can provide, the advisor will draft the legal documents and the letter of commitment. The document will specify the scope of the work to be carried out, the terms of the business relationship, the number of meetings scheduled per year and the remuneration of the advisor. This letter of commitment is signed before the start of the work.

“Letters of Commitment help CFP professionals to effectively communicate to clients the information required by the CFP’s Code of Ethics and Board Standards of Conduct when providing financial advice, financial planning or updating information, ”said John Loper, CFP and general manager of professional practice at CFP. Plank.

Because each client’s needs are unique, no two Letters of Commitment are the same. Here are the common sections that a sample letter might include:

  • A list of the services and products that the advisor will provide to the client, as well as an explanation of the advisor’s approach to financial planning.
  • How the client will pay for services and products, including how often the client will have to pay the advisory fee (quarterly, semi-annually, annually).
  • How the advisor will be paid. Often the client will pay the advisor’s firm and the advisor, who is salaried, will receive a portion of the fees the firm receives.
  • Any potential conflict of interest of the advisor or the firm.
  • The responsibilities of the client, which include the need to update and disclose their personal and financial situation.
  • The moment of engagement between the client and the advisor.
  • Privacy Policy for the Protection of Client Non-Public Personal Information.
  • Any public disclosure of disciplinary and bankruptcy history by the advisor.

What you need to know before signing a letter of commitment

The letter of commitment is beneficial to both the client and the advisor on many levels. On the one hand, it is a form of assurance, whereby each party knows the roles and responsibilities of the other, protecting both from the risk of being complacent or not knowing who is responsible for. what tasks. It also acts as a checklist, detailing what services will be provided, how those services will be performed and by whom, and keeps the client and the advisor on the same page. In addition, the letter helps clients become more engaged in planning their financial future.

While the Letter of Commitment is required before getting down to business with a finance professional, there are several things to keep in mind before signing on the dotted line:

It does not replace other legally binding documents.“It is important for clients to know that engagement letters do not replace CFP contracts, agreements or other legal or regulatory documents,” says Loper. An engagement letter is typically around eight pages long, and while it gives a clear and concise overview of the business relationship between the advisor and the client, it is by no means meant to be the only legally binding document requiring your signature. It certainly does not replace or replace other legal documents generated by your advisor, such as the ADV form, CRS form, or any other required by federal or state regulators or the financial sector regulator, depending on the CFP Board.

Read the letter carefully and ask questions. Yes, the engagement letter is designed to provide a high level overview of the relationship between the advisor and the client, but it also provides details of the terms of the relationship which, if not fully understood, could result in unnecessary confusion on the part of the customer. . If, for example, you think you’re billed to meet with your advisor once a year, but the letter says you have to meet quarterly (and be billed quarterly), this misunderstanding could be costly and ultimately lead to a breakdown in communication. And confidence. “The last thing you want to do is set up false expectations,” says Burke. Read the letter carefully and ask questions about the details of the conditions described.

Make sure all the necessary items are disclosed. The three main questions that the letter of commitment should clearly answer are: What services are you getting? How will the advisor be paid? How often will you meet with your advisor?

Understand the expectations your advisor has of you. The letter of engagement should clearly state who is responsible for each task and what information is needed to help the advisor do their job. “You want everything to be clear before labor starts,” says Burke. “It’s important for a client to understand the planner’s expectations of them because we need so much information from the client to do our job. Burke notes that one problem she’s encountered is that some clients think the financial plan is specific to one facet of their financial portfolio and are reluctant to provide financial information that is not specific to that plan. “It’s hard to give a client the financial advice they need without having access to all of their financial information,” says Burke. “We have to have the complete picture.”

Financial planning is different from financial advice. An engagement letter for financial planning is different from an engagement letter for financial advice, so clients should know the difference between the two and fully understand what type of engagement they are embarking on. A Financial advice the letter of engagement can deal with the details of a more transactional business relationship – the recommendation and purchase of specific financial products – while a financial planning the letter of commitment could spell out the details of a more holistic approach to the client’s finances.

It’s a long-term relationship, so be prepared for the changes. In many cases, working with a financial advisor is a long-term relationship, and during that time financial and life circumstances will change. It is important for you and your financial planner to be flexible and, if necessary, to re-evaluate the terms of the letter of commitment.

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