Tuesday, March 11, 2014

Entertainment Industry Financial Fails

The entertainment and sports industry is rife with examples of those who make a tremendous amount of money in a short period of time and then end up destitute. How is it that someone who makes over $300mm in a span of 15 years or so becomes bankrupt? The easy answer of course is that the person spent more than he earned. The more exact answer is that the person most likely trusted others who were not acting in a fiduciary capacity, ie, a person who had legal responsibility for managing the assets.

An article appeared in 2012 that described 15 Hollywood personalities who had gone bankrupt. It is probably safe to assume that in most cases, the person making the investments for the individual who eventually lost his or her money had some conflict of interest. Perhaps the individual managing the money stood to make commissions if he or she sold the entertainer certain investments. Perhaps the managing individual sold the entertainer investments in which the managing individual had ownership. Perhaps the entertainer got pressured socially by friends to jump on the bandwagon regarding certain investment. Perhaps the portfolio ended up highly concentrated; the old "all the eggs in one basket" scenario.

Rule one: Find a fee-only Registered Investment Advisor who is a fiduciary at all times. Use a person that is legally obligated to put client interests first and who is legally obligated to disclose any and all conflicts of interest. Ask for acknowledgement of fiduciary duty in writing.

Rule two: Make sure your Registered Investment Advisor's fees are low. A relationship over $500k should have fees less than 1%.

Rule three: Discuss your investment philosophy and see if the Advisor's philosophy, experience, etc. matches yours.

If investment management is something you either don't like or don't have the time or experience for, hire someone to do it. But hire someone who is a fiduciary and whose fees make sense. Don't end a great work career with no investments to live on.