It’s perhaps the ultimate irony when a financial advisor files for bankruptcy. But the CFP Board finds it is happening more and more often. Of 103 disciplinary hearings the board held last year, an estimated 25% of planners involved had filed for bankruptcy. In 2011, that number jumped to about a third.

“In my personal experience, the increase in bankruptcies really started last year,” said Michael Shaw, managing director of the CFP Board’s professional standards and legal departments. “My sense in reviewing decisions is that the downturn in the economy really shows itself in the bankruptcy area.”

Part of the increase is due to the fact that the board last year -- for the first time -- began explicitly asking planners to report any bankruptcies, personal or business, when applying for recertification every two years. Although bankruptcies among planners, when discovered by the board, have always prompted investigations, the number of known instances is now on the rise. In coming years, the board expects to collect and report more detailed data about the phenomenon.

For now, Shaw said the board is eager to get the word out that planners need to think carefully when considering whether or not to seek relief from a bankruptcy court.

“I think many of them are not aware of the effect of filing for bankruptcy,” he said. In some cases, the board’s Disciplinary and Ethics Commission may take no disciplinary action. But in others, he said, consequences can range from censure to revocation of certification.

“Bankruptcy is of such concern, of course,” Shaw said, “because it really calls into question an individual’s fitness to hold themselves out as a certified planning professional.” Of those planners who retain certification after a bankruptcy, many are required by the board to obtain remedial continuing education.

To remain in good standing, according to Shaw, all planners must be in compliance with rule 6.5 of the board’s Rules of Conduct, which reads, “A certificant shall not engage in conduct that reflects adversely on his or her integrity or fitness as a CFP professional, upon the CFP marks or upon the profession.”

In some instances, Shaw said, the board has judged that planners were not at fault in their bankruptcies. Often, bankruptcies are connected to illness. “That’s considered a significant mitigating factor,” Shaw said.

“At the other extreme,” he added, might be a planner with a second bankruptcy. “Or it could be a sole bankruptcy where the CFP profession did such a poor job or managing his or her financial affairs that he or she really caused the bankruptcy. That would be considered a fairly significant aggravating factor, particularly if there were warning signs.”

Sanctions aside, most planners are well aware of the risks to their livelihoods of filing for a bankruptcy. This 2009 Financial Planning magazine story (before the board started requiring mandatory bankruptcy reporting in 2010) found that discharging debts gave some planners a second chance, but led others to lose their businesses. 

The increase in bankruptcies among planners comes at a lag behind a recent peak in bankruptcies among the general public last year. In 2010 Americans filed nearly 1.6 million bankruptcy petitions, an increase of 8% over the number of filings in 2009, according to the American Bankruptcy Institute. However the number of bankruptcies has been on the decline this year, with petitions filed in October 2011 down nearly 20% from October 2010.

"The declining filings correlate to tightened consumer spending and the overall pullback in consumer credit associated with a stagnant economy," American Bankruptcy Insititute Executive Director Samuel J. Gerdano said in a statement. "We expect total 2011 consumer filings to be less than 2010."

With stepped-up reporting and enforcement at the CFP Board, the case may not be the same in the financial planning community in coming years.


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