Executive Summary
On January 18, the CFP Board issued proposed changes to its process for addressing bankruptcies of CFP professionals and candidates for certification. Under the current rules, CFP certificants and candidates who experience a single bankruptcy are subject to a hearing by the Disciplinary and Ethics Commission, which may result in disciplinary action including a private letter of censure, suspension, or revocation of the marks. Under the proposed rules, the disciplinary process would be eliminated, and replaced with a disclosure process that would require CFP certificants who experience a single bankruptcy to have such bankruptcy publicly disclosed on the CFP Board's website for a period of 10 years, but no longer otherwise be subject to discipline or restrictions regarding the CFP marks. The comment period for the proposed changes ends on Friday, February 17th, and in today's blog post I share my own comment letter feedback to the rule.
For more discussion of the CFP Board's proposed changes regarding bankruptcies, see "CFP Board Relaxes Its Position On Financial Planner Bankruptcies... Sort Of" posted on this blog in January.
An array of comment letters have already been submitted to the CFP Board, and below is my own comment letter, as submitted to the CFP Board on Tuesday, February 14th:
To Whom It May Concern,
I am writing to submit comment regarding the proposed changes to the CFP Board’s process to address single bankruptcy filings by CFP certificants and candidates.
Unfortunately, I cannot agree entirely with the proposed changes, including the new non-disciplinary public disclosure process for a single bankruptcy, for the following reasons:- Altering the treatment of bankruptcy by a CFP certificant or candidate amounts to a dramatic 180-degree reversal in the CFP Board’s established Fitness Standards for CFP candidates and registrants. The stated purpose of the fitness standards is “to ensure that an individual’s prior conduct would not reflect adversely upon the profession or the CFP certification marks.” Historically under the fitness standards, a financial planner who could not manage his/her own financial affairs was deemed to reflect adversely upon the profession and/or the CFP certification marks. In a world where financial planners continue to fight for credibility in the marketplace, I do not believe there is a need to alter this fitness standard. Indeed, a shift to both eliminate the disciplinary process for CFP candidates and registrants who face bankruptcy and add a public disclosure element amounts to a 180 degree reversal in the position of the fitness standards, as not only are candidates and registrants allowed to represent the marks and the profession despite failing to manage their own affairs and facing bankruptcy, but that fact that many CFP certificants cannot manage their own financial affairs is openly promoted under a disclosure standard! Although I realize that it can be controversial, in the spirit of the CFP Board’s mission to protect the public and the credibility of its marks, I support the fitness standards as they currently exist, where exceptions apply only on an individual basis based on the DEC's interpretation of the facts and any mitigating circumstances. Furthermore, I question whether the public routinely verifies the status of a CFP certificant through the CFP Board's website anyway - which means eliminating a disciplinary proceeding and introducing a mere disclosure requirement amounts to no protection at all. And for that matter, I believe it would detract from the marks further if we routinely encouraged members of the public to go to the CFP Board's website, just to verify whether a CFP certificant has public record of concern; if the CFP marks are intended to be the gold standard, doesn't that imply the public should be comfortable to rely on them without seeking to verify if their are public disclosures of concern!? I believe this proposal represents a significant and adverse diminishment in the fitness standards and therefore a diminishment in protecting the credibility of the marks pursuant to the CFP Board's mission.
- The implied purpose of this change is to allow the CFP Board to allocate more resources to other disciplinary and ethics matters, such as "fraud, misrepresentation, and misappropriation of funds." This hardly seems necessary nor appropriate in a world where bona fida legal regulators, not to mention the legal system itself, already oversee the activities of those licensed to provide insurance or investment advice or products regarding this type of clearly illegal behavior. Not only does the CFP Board not have legal standing to investigate most of these matters anyway, but investigation by a bona fide regulator followed by a guilty finding would generally bar an individual from practice anyway, making the CFP Board’s investigation a moot point. The CFP Board already has a process to initiate disciplinary action against a CFP certificant found guilty of regulatory or legal misdeeds, including fraud, misrepresentation, and misappropriation of funds; it is unclear why the CFP Board would require more resources to provide investigation and enforcement in such already-regulated areas, nor is it clear whether the CFP Board would have any capability to be more effective than existing regulators by dedicating its resources in this manner. In fact, given the reality that the CFP Board is not a legally recognized regulator, it would appear to me that the primary purpose of the CFP Board’s DEC is to monitor the behavior of its certificants in areas not already covered by other regulators or parts of the law to be consistent with its mission, which means overseeing issues like the fitness of a certificant to practice after a personal bankruptcy is in fact the ideal allocation of DEC resources.- Another stated purpose of this change is to allow the CFP Board to provide notice to the public that a CFP professional has filed bankruptcy. Of course, under enforcement of the existing Fitness Standards, this has generally been unnecessary, as any such bankruptcy would have potentially barred the individual from the marks anyway, and presumably in situations where the DEC found it appropriate to allow the marks despite a bankruptcy, such mitigating circumstances would make disclosure less of a concern. In addition, the reality is that disclosures of bankruptcy by licensed individuals is already required by both the SEC on Form ADV Part II, and by FINRA on Form U-4, making the CFP Board’s disclosure efforts redundant at best for the overwhelming majority of CFP certificants. And of course, the fact remains, as noted earlier, that I believe the current Fitness Standards represent an appropriate position of the CFP Board to protect the public and the credibility of its marks, which means many such bankruptcies would already bar the individual from the marks anyway, eliminating the need for disclosure at all.
Notwithstanding the aforementioned concerns, I do believe that the alterations of the proposed changes regarding bankruptcy are appropriate in one regard – the elimination of a prior bankruptcy by a CFP candidate (but not registrant) from the disciplinary process. The purpose of the fitness standards is to ensure that the behavior of certificants will not reflect adversely upon the marks and the profession; accordingly, it seems clearly that the greatest conflict would arise when a current certificant, who has been personally trained as a financial planner, fails to manage his/her own affairs without any mitigating circumstances (which can be evaluated by the DEC). On the other hand, it is unclear to me why prior financial struggles of a certificant before that training occurred has any bearing on the situation; in fact, many financial planners come to the profession specifically because they have overcome prior financial difficulties, educated and improved themselves, and now seek to help others. Furthermore, I find that certificants who have had prior bankruptcies but now manage their financial affairs effectively as a CFP certificant often have greater credibility and a better ability to connect with and relate to clients because of their own experiences. Accordingly, I would suggest that while the current rules regarding single bankruptcies should be retained for a single bankruptcy by a current CFP certificant – including a disciplinary process by the DEC to determine whether a disciplinary action is appropriate – a single bankruptcy that occurred prior to a CFP certificant beginning the CFP certification process should have no bearing on the fitness standards at all. Even if the current rules are adopted in proposed form, I hope that the CFP Board will consider focusing on disclosures of current CFP certificants, not the single bankruptcy of a CFP candidate before he/she even began his/her financial education.Thank you in advance for your consideration of this comment.
Respectfully,
- Michael KitcesDirector of Research, Pinnacle Advisory Group
Publisher, The Kitces Report, www.kitces.com
Blogger, Nerd’s Eye View, www.kitces.com/blog
So what do you think? Do you agree with my comments? Disagree? What about the proposed changes themselves? If you haven't yet, there's still time to submit your own comment to the CFP Board by emailing [email protected].
In Denver, we have a consumer advocate who advocated financial soundness – who had sponsors (commissioned) – who went bankrupt with big real estate deals etc – and transferring assets to his spouse ‘to keep peace in the family’ just before the bankruptch.
How can one trust a consumer advocate a personal financial planner if the ship’s captain lectures on navigation as his own ship sinks?
Disclosure + discipline as it does reflect on the business.
As Ghandi said, ‘be your message’ Well if a planner goes bankrupt -even due to health costs (as he or she should know about insurance) his message and the purported message of the business is corrupted.
Per Ben Franklin – better done than said.
The CFP Board’s Message is we are a trade organization who’s bureaucracy depends on membership increasing – not decreasing. So one might suspect this dilution is about the CFP Board’s revenue not the integrity of the business (notice I DOT NOT USE THE WORD PROFESSION)
The other reasoning – redeploy resources is a good reason – it appears – but not the real reason – just more spin.
The CFP Board was born in sin, has lived in sin (remember CFP lite) and continues to MISS THE MARK.(The Greek definition of Sin)
I would like to see the conversation turn away from general opinions and the myths as to why bankruptcy happens, and move more towards having some data to back whatever the end decision is. The public flogging and demonization of CFP(r) professionals whose last resort is filing bankruptcy I don’t see as being useful or as protecting anyone, and I see the CFP Board reconsideration as a half-step towards that admission.
Is it true that individuals that declare bankruptcy failed “to manage their own affairs”? And specifically does this ‘failure’ has anything to do with being a good financial planner?
I see the CFP Board looking at the issue as admitting that they recognize that many who declare bankruptcy did not “fail” to manage their affairs. I think those that have this opinion generally have not worked with bankruptcy filers. The reasons I see for bankruptcy include: business ventures gone wrong, lawsuits, having an ex-spouse run up debt, real estate, having taken on debt with promises to be repaid, etc. In many of the above cases the one that comes from less financial means declares bankruptcy, though in many cases it was simply a relationship with someone else that caused it. Why is it we need to further attack that individuals ability to earn a living?
What case above makes an individual not worthy to provide a financial plan?
Should Dave Ramsey decide he wanted to be a CFP(r) professional, you would believe the public should be protected from him by announcing to the world he declared bankruptcy?
No, it’s not the case the public would be any more protected, and as noted it is duplicative for CFP Board to publicize the bankruptcy. Since consumers rarely research advisors on the site, it’s only purpose will be in competitive situations where advisors look to use information against a CFP(r) professional, who may be better educated, held to higher professional standards, and frankly more experienced to serve those in similar situations than their competitor.
The great myth of bankruptcy is it happens to those that just choose to live large – that’s not the reality of it at all. Out of a dozens or more than I know have filed, I can think of one who bought far more house than they should have, which led to their eventual filing. Is that some sort of gross mismanagement of finances? Maybe. Lucky for them their profession doesn’t yet feel the need to judge them based on one bad decision like ours does.
We need less generalizing on the topic, and more data to show whether or not the premise is true that 1 bankruptcy = financial wrecklessness and is worthy of informing consumers, which should include feedback from consumers, but also some way of gauging if a consumer is better off with a CFP(r) professional who understands the costs of bankruptcy, versus a non-CFP(r) advisor.
Rob,
Thanks for the feedback.
Obviously we don’t agree on a few points here, but I hope you’ll also take a moment (if you haven’t already) to submit these comments directly to the CFP Board at [email protected]. The CFP Board should hear everyone’s thoughts!
In addressing your points quickly, though, the overwhelming majority of bankruptcies I’ve seen stemmed from one of three problems: sheer spending profligacy, failure to insure against catastrophic risks, or failure to insulate oneself against business liabilities (I’m not talking about being sued for professional malpractice, but simply scenarios where the business fails and the business owner’s personal assets go down the drain with it). Broadly speaking, these are all situations where I think it’s reasonable to suggest that prudent financial planning should have played a role. To say the least, I would be wondering if the financial planner HAD a financial planner and financial plan themselves, if these issues/risks were addressed in the plan, etc. If the reality is that the DEC will investigate all these bankruptcy issues and find the overwhelming majority really were unexpected, unrelated, and overwhelmed even a well crafted financial plan, so be it. I do not wish to preempt the DEC’s process. The point here is simply that I think it IS fair ground for consideration by the DEC.
Whether we like it or not, the PUBLIC does perceive a significant conflict when people who give financial advice have their own financial problems (just look at the incredibly negative comments to last year’s Carl Richards New York Times story, and there was ‘merely’ a short sale and not a bankruptcy scenario!). So I think it’s well within CFP Board’s rights to address bankruptcy situations and protect the marks accordingly.
Regarding the Dave Ramsey example, I’d point out that: a) he wouldn’t be subject to these rules anyway, as the bankruptcy happened decades ago; and b) in my own comments I agree with you that bankruptcies occurring prior to CFP certification training shouldn’t be on the table.
Respectfully,
– Michael
Thanks for the great dialogue as always Michael. My main point is I’d like to know that the above first off isn’t hurting financial planning and the willingness of consumers to seek financial help from a CFP(r) professional, which I don’t see in the release or really anywhere. While the technical aspects of the Ramsey example may have excluded him from punishment, we should consider the next public figure for personal finance may be a CFP(r) professional, and if one is to have the same reach as Dave.. who knows, they may be in that same real estate situation he found himself in.
Is there a way we can judge 1 bankruptcy filing as being in the public interest or not to disclose. I don’t believe it’s possible, and certainly isn’t without examining the issue to know if disclosure on the whole is helpful or not. I clearly don’t believe there is when the reasons leading to it are varied, and the ability to avoid it is mostly based on the quality of the personal and financial relationships one has and not their abiltiy to manage their finances. 2 or more, I would be on board with having a higher public disclosure standard.
Michael,
Be careful of letting a good narrative get in the way of the facts.
42% of bankruptcies are from medical expenses. And 78% of those filers had medical insurance. So we are clearly talking about medical problems that swamp the normal risk management provided by medical insurance. I personally have seen a number of families go down the hole trying to provide care for a very sick child or spouse. Is that really a reason to take away the livelihood of this person?
8% of bankruptcies are from divorce. Again, if your spouse runs away with another person and trashes your finances in the process is that a reason to take their livelihood away too?
Are there bankruptcies that are the result of poor planning? Definitely! But there are MANY which cast absolutely no aspersions on the planner’s planning ability
With respect,
David
David,
Understood that bankruptcies can come from a myriad of circumstances. But I am NOT advocating that all bankruptcies result in a removal of the marks. I am simply advocating that having the DEC hear the individual’s situation and any mitigating circumstances is an appropriate path.
In fact, that approach specifically allows for a distinction in the kinds of situations you highlight, between people who mismanage their own affairs, versus people who are genuinely subject to circumstances beyond their control.
By contrast, with the CFP Board’s proposal, ALL bankruptcies will be publicly branded with a scarlet letter “B” regardless of personal or mitigating circumstances, simultaneously denigrating those who faced a bankruptcy beyond their control while allowing continued practice of those who genuinely represent the profession poorly by failing to plan for themselves.
Respectfully,
– Michael
CFO Board posts all comments on its site. You can be listed as “anonymous” if you wish.
For what its worth, my comment to CFP Board:
“First, I wish to commend CFP Board for putting this issue out for comment. The more input CFP Board gets the better for all.
Second, having served on the DEC, I am sympathetic to the desire to avoid bankruptcy issues dominating DEC hearings and resources.
However, after reflecting on it, I am not a fan of this proposal.
The DEC examines the facts and circumstances surrounding a bankruptcy because all bankruptcies are not equal. Some are “forgivable” while others directly relate to the conduct of someone entrusted with helping the public make financial decisions. This proposal strikes me as treating all bankruptcies the same and putting the burden on the client to determine whether the bankruptcy represents a problem. Philosophically, I lean more toward the school of thought that experts should make that determination, not clients.
I have no problem with disclosing bankruptcies to the public. Practitioners are required to disclose such matter already through a variety of regulatory entities. I do not support the idea of removing a public discipline from the record. Discipline was imposed after the matter was reviewed through the disciplinary process and the DEC, and in some cases the Board of Appeals, decided the action warranted discipline.
In light of my view that not all bankruptcies are on equal ground and experts should determine if there is a problem, I believe a bankruptcy should remain a presumptive bar under candidates fitness standards until an evaluation of the matter has been completed.
I do not have specific ideas to offer at this time but my preference would be to alter the guidelines and create clear standards for staff when these cases first come up to better separate the clearly forgivable bankruptcies and clearly problematic bankruptcies from those that require DEC evaluation.
Again, I appreciate CFP Board soliciting opinions on this. The more transparency and engagement with certificants, the better.
Respectfully,
Dan Moisand, CFP®”