Bankruptcy’s lessons for advisers

Bankruptcy happens. It happens to mechanics and moguls, surgeons and salesmen, teachers and tycoons. Bankruptcy can happen to anyone in any profession — including financial advisers.

Indeed, financial advisers are not immune to the myriad misfortunes and events that often push individuals into bankruptcy: divorce, illness, job loss, a failed business venture and, yes, even an excessive use of credit.

Financial advisers must always aim to be above reproach when it comes to how they handle their personal finances, however. They must practice what they preach, and apply prudence and common sense to their own financial planning and preparation. 

HEAL THYSELF

After all, how can advisers reasonably expect to be entrusted with their clients’ life savings if their own financial house is in shambles?

They can’t.

That said, advisers with a past bankruptcy or facing an impending one owe it to their clients to be upfront and transparent about what led to their decision to seek legal relief from their debts.

Clients should never learn through a public record or newspaper, or from gossip, that an adviser has filed for bankruptcy.

Certainly, talking about your own financial troubles with a prospect or client isn’t easy. But done right — that is, with complete honesty and a dose of humility — that difficult conversation may make the difference between holding on to the full faith and confidence of a client, or losing it.

The number of nonbusiness bankruptcies filed in U.S. courts topped 1 million last year. That is down significantly from 1.54 million in 2010 but is an increase from about 600,000 in 2006. 

Though financial advisers should always consider bankruptcy a last resort, those who have found themselves in dire financial straits as a result of extraordinary circumstances and had to file should never try to conceal those facts from their clients or prospects.

Like many of life’s hardships, financial and otherwise, personal bankruptcy offers advisers a chance to transform a crisis into an opportunity — not just one to clear their financial slate but one to better relate to their clients’ struggles with money.

In the end, it could even make them better advisers.