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Why Celebrities Make Bad Investments

December 28, 2017

Celebrities get more publicity than we do. Many make their money quietly but when they get into trouble or go bankrupt it becomes front page news. But for every Ashton Kutcher with a VC fund or Jay-Z who was an angel investor in Uber’s 2011 Series B funding round, you have celebrities who blew up their finances.

Need some examples? Nicolas Cage owned 15 homes before the real estate collapse. His lifestyle cost $30 million a year to maintain. Mike Pelfrey, the MLB pitcher, had 99% of his assets frozen when Allen Stanford’s bank in Antigua turned out to be a Ponzi scheme.

What Mistakes Do Celebrities Make?

Getting poor financial advice is high on the list. Eric Dickerson, the 1999 NFL Hall of Fame inductee, thought his financial advisor was an Italian count, not a two-time felon. In the fictional HBO series "Ballers," NFL player Vernon Littlefield’s childhood friend Reggie, handles his money. He is clearly out of his depth.

Many athletes think the good times will last forever. Here’s the reality: The average major baseball career is 5.6 years. At 3.3 years on average, professional football careers are even shorter. When players assume their big paychecks will continue in perpetuity, they don’t scale down their spending as earnings decline.

You would be surprised at the number of celebrities with outstanding tax liens or even more serious problems with the IRS. Leona Helmsley, famous for saying “Only the little people pay taxes,” was eventually convicted on 33 felony counts for mail fraud, tax evasion and filing false tax returns.

Celebrity divorces can cost a bundle – and make headlines. In 2010 the British publication The Sun reported the Tiger Woods/Elin Nordegren divorce ended in a $750 million settlement. Now consider the wealthy in the larger context of the general population. In his book "The Millionaire Next Door," author Tom Stanley makes the point that “one of the main reasons they are wealthy is that they have stable and long-term marriages.”

Some celebrities get into trouble because they don’t pay their bills. They have cash management issues. In 2010 TMZ News reported the singer Toni Braxton, who filed for Chapter 7 bankruptcy in California, might have owed as much as $50 million. You would’ve rightly expected the list of creditors to include Tiffany and Co. and the Four Seasons, but perhaps more surprising were the Nevada Power Company, Direct TV and AT&T. The IRS made the list too.

Celebrities are well-known for overpaying for real estate, not keeping up with mortgage payments or investing in property to flip, then discovering it’s not moving and they need to pay the carrying costs.

But why do many celebrities succumb to the allure of owning a restaurant? According to a 2005 study done at Cornell University, “26.6% of independent restaurants failed in the first year.”

Lack of a proper estate plan has cost some celebrities big. Jimi Hendrix died without a will and it’s been said his descendants worked for 30 years sorting out his estate. According to Forbes, Prince, Barry White, Pablo Picasso, Martin Luther King Jr. and even Abraham Lincoln belong to the club of people who died intestate.

But don’t these celebrities have business managers?

Yes, they do. And yes, there’s an app for that. The website Who Represents is one of several that sell contact information services on a monthly or annual basis. It has a database matching celebrity names with their key advisors. This often includes their agent, manager, publicist and attorney. As an experienced financial advisor, you know you can help people avoid these problems. At least now you have a contact.