CFP Board Did the Right Thing on Planners’ Bankruptcies

On the other side of the coin, of course, is the fair treatment of CFPs who have filed for bankruptcy.  As we all know, personal finance can be a complex affair, and bankruptcy is no exception: sometimes, it’s the unavoidable consequence of circumstances beyond one’s control, or, as can be in the case in reorganization under Chapter 11, the financially responsible thing to do. For instance, I know of two financial planners who had most of their clients literally stolen by their partner (with the help of the firm’s BD), and their local reputations severely damaged by ultimately baseless accusations. 

To keep their doors open so they could continue to serve their clients and pay their creditors, they had no choice but to file for bankruptcy protection. It worked: they got back on their feet, paid back everyone 100 cents on the dollar, and built up a successful practice. Which raises the issue of piling on: By revoking planners’ CFP designations, and public admonishing them for their bankruptcy, I have to believe that the Board often did more harm than good—both to the planners involved, and to their clients—by making it that much harder to recover from the events that created the need to file bankruptcy in the first place. 

On balance, it seems that with its new rules, the CFP Board has done exactly the right thing: taken itself out of the business of “judging” bankruptcy filings, and leaving those judgments up to the clients, through disclosure. That way, if a bankruptcy is a disqualifying screen for a prospective client, they can do what they think is best, or others could give the advisor in question the opportunity to explain the circumstances, and can then decide whether it’s material. 

I certainly understand the concern that financial problems can put pressures on an advisor to act more in their own interest than the clients’. But I also suspect that having gone through a nightmare like a bankruptcy will make some financial planners better advisors. I remember my father, after dealing with the treatments for what eventually became terminal cancer, telling me how he would have been a far better doctor for the experience. Bankruptcy seems to be one the circumstances where full disclosure will enable the clients to make the best decision for themselves.