John E. Matheny had a thriving financial planning business, with $35 million in assets under management, until three years ago. That's when the planner confronted disorder in his own finances.
After what he describes as "a perfect storm" of personal and financial misfortunes - including the breakup of his marriage, an unexpected surgery on his neck and the crash of the Florida real estate market in which he was heavily invested - he filed for protection under Chapter 7 of the federal bankruptcy code in December 2009. Matheny's bankruptcy led the Certified Financial Planner Board's Disciplinary and Ethics Commission a year ago to suspend his right to use the CFP certification marks.
But while he recognizes his errors, Matheny isn't discouraged by the bankruptcy and the related CFP suspension. In fact, he ultimately believes it will make him a better financial planner. "Going through what I went through will make me more empathetic to my clients. When clients do not like leverage, that carries much stronger weight with me now. I can understand a lot more about people not wanting leverage and debt anymore," says Matheny, who will not be able to reapply for his CFP certification marks until 2013.
LEARNING FROM BANKRUPTCY
Some industry leaders agree that the client-advising abilities of some planners who've filed for bankruptcy may actually improve once they emerge from their personal fiscal fiasco. Considering that the number of planners who've filed for bankruptcy is swelling, that viewpoint may offer some consolation.
Amid the recession, personal bankruptcies filed by the U.S. population totaled 1.41 million during the 12-month period ending Sept. 30, 2011, down almost 8% from the previous year but still up 40% from the prerecession 12-month period ending Sept. 30, 2008. The CFP Board reports that the number of its members who filed for bankruptcy rose to 48 last year from 28 cases in 2010, and up from the eight reported to the board in 2009.
Based on current regulations, a planner who declares bankruptcy and reports the filing to the CFP Board, as required, triggers and automatic disciplinary investigation. In those instances, investigators from the CFP Board's Disciplinary and Ethics Commission attempt to determine whether extenuating circumstances made the bankruptcy filing impossible for the planner to avoid. Or they may consider whether the bankruptcy filing indicates that the planner is unfit to help manage clients' finances. The CFP Board may issue a formal admonition, or suspend or revoke a member's certification as a result.
However, with bankruptcies becoming more common, the CFP Board has proposed changing the way the organization handlees members who file bankruptcies. The board is considering whether to replace the current disciplinary approach to cases involving a single bankruptcy with a policy that requires only for planners to disclose a bankruptcy filing publicly. As proposed, the rule change would mean the CFP Board will no longer investigate planners simply because they identify on a certification application or certification renewal application that they have filed a single bankruptcy.
In January, the board asked for comments from CFP professionals and others on the proposed rule change. As of last month, it had already received about 250 responses. "People are very passionate about this issue," says Michael Shaw, a managing director for the CFP Board who supervises both the professional standards and legal departments.
"They are either very much in favor of the notion that, if you are a CFP professional, you should never file a bankruptcy," Shaw adds, "or that a bankruptcy is something a client doesn't need to know about, that just because you filed a bankruptcy doesn't mean you wouldn't do a good job for your clients." Shaw says his staff will review the comments - the deadline to submit them was last month, although tweaking the proposal and extending the deadline was being considered - before going to the board for final approval.
Under the current proposal, a planner like Matheny whom the CFP Board disciplined due to a single bankruptcy would have the option of having that disciplinary action reversed and having the board issue a press release announcing the retraction. But unless the organization approves the proposed changes, during what Shaw refers to as "this transition period," the board will make no reversals or retractions.
Edward Mora, who served on CFP's Board's Disciplinary and Ethics committee for five years, including as chairman last year, says planners who file for bankruptcy may indeed receive valuable and cautionary lessons from their insolvency that ultimately they could teach clients. "If they are up front when clients ask them about the bankruptcies, it could be a story of redemption. I can see it being very useful as a learning experience," Mora says.
LISTENING AND JUDGING
Sheryl Garrett, founder of the Garrett Planning Network, adds, "Sometimes, the most powerful lessons we learn in life are painful. Bankruptcies are definitely painful. It's got to be one of the most embarrassing things that can happen to a financial planner. But it doesn't mean they shouldn't have the same rights as other people who file bankruptcy and get to keep their jobs," she says.
Garrett last summer volunteered to help the CFP Board hear the defenses of financial planners facing disciplinary investigations, including ones who had filed bankruptcies and triggered the probes. To determine whether a bankruptcy filing merits an admonition, suspension or revocation of a license, Garrett believes CFP investigators must examine details behind a planner's money woes. She considers if the planner sought protections under Chapter 13 of the bankruptcy code, seeking only a reorganization of liabilities while maintaining a commitment to pay lenders as much as possible during a three- to five-year period.
Garrett believes the CFP Board should evaluate much more sternly planners who are Chapter 7 bankruptcy filers. Chapter 7, or what's often referred to as liquidation, is usually an attempt to wipe a liability slate clean by agreeing to keep only minimum assets but otherwise extricating the bankruptcy filer from any future payments to lenders.
Another key question for Garrett: Was the underlying financial pain self-inflicted? Or did unforeseen events - a medical crisis or divorce - play a pivotal role? "I don't think the public would blame a financial advisor who had good health insurance but had to declare bankruptcy because some medical problem created huge costs nonetheless," she says.
Alternatively, she learned while volunteering for the CFP Board about one planner who'd filed a Chapter 7 bankruptcy after taking on excessive leverage and establishing concentrated positions in risky markets. "If he had put any of his clients in those positions, I would really have a problem," Garrett says. She questioned the wisdom of giving that planner a second chance and, at a minimum, thought about suggesting he retake the board's exams before reapplying for his certification.
IN THE INTERIM
With the bankruptcy court case closed but his certification suspension still pending, Matheny works helping a group of planners in Cornelius, N.C., at Invest Financial Corp. He says he gives people the same level of care and advice as he did previously, but does not hold himself out as a certified financial planner. The group has $30 million in assets under management.
Matheny looks forward to reapplying for his certification as a financial planner. "I love what I do. I love being able to help. I don't think that bankruptcy has a negative impact on the quality of the advising that I will be doing as a financial planner," he says.
His bankruptcy, Matheny says, occurred despite his careful structuring of real estate investments to maintain a 50% equity stake at all times. At one point, he had invested nearly $2 million in residential real estate in Florida. But when the downturn came, it hit hard and fast, and Matheny had no time to get out. "The market just crashed," Matheny recalls.
So fast and so precipitous were the price drops at a time when his marriage and health failed him, Matheny never recovered his financial footing. According to court records, Matheny and his now ex-wife discharged claims that topped $2 million without payment.
Since he was hospitalized for weeks after his neck surgery, Matheny's bookkeeping fell behind and that hurt him too, he says, when the time came to explain his Chapter 7 filing to the CFP Board. He missed a deadline for responding to the board's request for information about his bankruptcy - a mistake noted unfavorably by the panel conducting his disciplinary investigation.
Initially, the board suspended Matheny's certification for one year. Matheny appealed, hoping for a better outcome. But the second hearing led to a worse outcome - a two-year suspension.
Matheny hardly casts blame on the CFP Board. "I think it's a great organization. Obviously, they had to pass out some kind of sanction for my bankruptcy." He adds: "I am more dedicated to the industry now."
Many bankruptcies do not lead to industry sanctions. The cause of the bankruptcy and a planner's actions before, during and after also weigh heavily. An unexpected and lengthy hospital stay preceded a Chapter 7 bankruptcy filed by Craig Alan Horner, a planner for Magis Group in San Diego.
Horner filed his case in February 2010 and it closed in June of that year. With the bankruptcy, he discharged some $500,000 in claims without payment, according to court records. In March 2011, the CFP Board issued Horner a letter of admonition, stating that he "displayed an inability to manage his personal finances and, by filing the bankruptcy, engaged in conduct which reflects adversely on his integrity and fitness as a CFP professional." But notably, the board did not revoke or suspend his CFP certification.
Horner believes he helped the investigators fully understand his plight by sending them copies of the $300,000 he had tallied in medical bills. An auto accident had put him in the hospital. His doctors failed to discover until four days into his stay that his colon had burst - creating a life-threatening situation, the need for emergency-trauma surgery, six weeks of hospitalization and months of recuperation.
As a result, Horner was incapable of seeing clients or otherwise working, and had to sell his practice. He had purchased two disability insurance policies but income from those failed to meet the high cost of living to which his family had grown accustomed.
Ultimately, Horner says, the experience taught him a valuable lesson that he applied initially to his own situation and now dispenses to clients. He had been supporting an ex-wife living in Europe and adult children.
With the bankruptcy and the reality it cast on his financial resources, he rethought his spending and, he says, only then realized: "Lo and behold, it was better for the [adult children's] self-esteem to take hold of their own lives."
Horner now advises clients with financial constraints to curtail support of adult children and even spouses, former or current (unless they are legally obligated to do so) . Horner also follows another simple rule: "I only keep a debit card in my wallet," he says. FP
Miriam Rozen is a staff reporterat Texas Lawyer in Dallas.