A CFP professional has a potential conflict because they receive a referral fee from a mutual fund company for recommending its fund. What is required?

• A. The conflict should be disclosed to the client after the engagement is completed.
• B. The conflict must be disclosed only if the client asks.
• C. The conflict must be disclosed to the client clearly, obtain informed consent, and be managed or avoided.
• D. The CFP should terminate the engagement to avoid any conflict.

Answer: (C)

A potential conflict arises when compensation from a fund company could influence the CFP professional’s advice. The correct approach is to address this openly with the client: disclose the conflict clearly, obtain the client’s informed consent in writing, and implement steps to manage or avoid the conflict within the engagement. This means explaining how the referral fee works, how it could affect recommendations, and what protections or checks will be in place to preserve the integrity of the advice. If the conflict cannot be managed effectively, the engagement should be terminated to protect the client’s interests. Disclosing after the engagement, or only if asked, or automatically terminating every time are not appropriate because they fail to provide timely, informed, and practical safeguards for the client.