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More Money, More Problems ... Without a Good Advisor

June 21, 2018

You would think people with money would work hard to keep it. Sports figures earning high incomes over short careers can be especially vulnerable to financial problems. The NFL Players Association maintains an approved financial advisors list. But star athletes and other celebrities still get into trouble, largely because they can invest with whomever and in whatever they choose. So why do people who should know better make bad investments?

Concentrated positions

Putting too many eggs in one basket is a major problem. In 2006, about 70% of the dividend and interest income for Steven Spielberg’s Wonderkinder Foundation came from his investments with Bernie Madoff. Kyra Sedgwick, Kevin Bacon, Larry King and Elliott Spitzer also lost money through Madoff's Ponzi scheme.

How an advisor could’ve helped: Your client cannot buy into an investment unless it’s been documented that your firm has done due diligence beforehand. Here’s a few examples of investment ideas which went bad for celebrities but would’ve been quickly identified by a good financial advisor.

Yield greed

Darren Gough, the retired England cricketer, was offered an investment purportedly yielding 13% a month over a four-year period. The rationale was the money was being lent to distressed companies with cash flow problems.

How an advisor could’ve helped: If your client mentioned they heard this great idea, you would tactfully explain why these returns are impossible to achieve.

Alternative investments

In the late 2000’s Kiefer Sutherland lost money in an investment to cheaply buy cattle in Mexico, then resell them in the U.S. at higher prices. It was a fraud.

How an advisor could’ve helped: You would help your client do adequate due diligence. The lack of material available would be a good clue something was wrong. Have there been complaints about the people running the investment?

Sending money offshore

Mike Pelfrey, first round draft pick for the New York Mets in 1995, had 99% of his assets frozen when Robert Allen Stanford’s Ponzi scheme selling fraudulent certificates of deposit through his bank in Antigua collapsed.

How an advisor could’ve helped: You start by explaining FDIC insurance associated with American banks isn’t going to reach beyond America’s shores.

Borrowing money … and not repaying it

Boris Becker, the famous German tennis star, made the BBC news recently. In 2017 he was declared bankrupt over money owed to Arbuthnot Latham, a private bank. He has a unique defense, claiming diplomatic immunity because of a recent position he took on with the Central African Republic, a sovereign country.

How an advisor could've helped: Financial planning is part of your business. You would let your client know when they were getting in over their head. Ideally this would be way before their finances reached the tipping point.

Tax evasion is another form of bad investment decision making

Michael Sorrentino, the “Jersey Shore” star, pleaded guilty to tax evasion in January 2018. As well as avoiding filing requirements on bank deposits, he also considered luxury cars and clothing to be business expenses.

How an advisor could've helped: You aren’t an accountant but you could make a few recommendations when it becomes obvious they need one.

Not downscaling lifestyle when income changes

At one time MC Hammer maintained a household staff of 200 people, costing him $500,000 a month.

How an advisor could've helped: Financial planning is part of your practice. You run projections. You ask the hard questions.

Ignoring bank overdraft fees

Toni Braxton may have set a record around 1997 when she ran up $500,000 in bank-imposed overdraft charges.

How an advisor could've helped: You would probably talk about securities-based lending and cash management accounts, bringing their checking and bill paying in house.

House flipping is easy, isn’t it?

It certainly looks that way on television. As reported by TheStreet.com and BusinessInsider.com, in 2007, the American singer Beck bought a 5,700 square foot house as an investment for $ 6.8 million, later listing it for $9 million. Years later, he sold it for about $1.4 million less than he paid.

How an advisor could've helped: You would discuss the carrying costs, best- and worst-case scenarios.

Don’t buy into a hedge fund from the wrong person

Terrell Davis, a running back for the Denver Broncos from 1995 to 2001, lost money when he invested with hedge fund manager Kirk Wright. Wright committed suicide in his jail cell in 2008 after being convicted on 47 counts of fraud and money laundering. This incident is complicated because Wright was on the list of financial advisors provided by the NFL Players Association at the time.

How an advisor could've helped: You are ethical. Investments you offer have been through compliance review at your firm. You explain diversification and discuss inherent risks. You wonder how you can get onto that list of financial advisors available to players.

Ethical financial advisors can steer people away from many of these problems. It’s another way you add value to the client relationship.