Pop music queen Lady Gaga is number 2 on the Forbes list of the highest paid women in music in 2013, with an annual paycheque of about $80 million. No doubt she added to her millions with this week’s appearance on NBC’s highly rated music competition The Voice, where pop star wannabe contestant Tessanne Chin took the big prize. No wonder everyone wants in on the action! But being a pop celebrity doesn’t mean you know anything about managing money. We’ve often read how this or that star ends up in the poorhouse by getting bad advice – and we wonder how that could be even remotely possible. So here’s my advice to all you budding pop stars on how to stay out of the poorhouse when you hit the big time. And it applies equally to all of us lesser mortals as well.
Without question, trust is the number 1 ingredient when seeking financial planning advice. Your financial adviser is someone who will be advising you on all aspects of your financial life. That means you need someone who can create a financial plan to meet your life goals and objectives. That gets pretty personal, and so a deep level of trust must be implicit in any relationship with a financial advisor.
This becomes especially important in how assets are deployed and what investments are selected to best meet your goals and your tolerance for risk. It’s here that budding celebrities – and often, their more experienced colleagues too – run into trouble. A bad investment in, say, a chain of restaurants, hotels, nightclubs, and the like (seemingly always a favorite with glitz and glam set), can drain away a rich asset base in the blink of an eye.
So more important than picking individual investments is for an advisor to apply best industry practices to asset allocation. Research has shown that up to 95% of investment return is a result of proper asset allocation. That means appropriate diversification across a range of asset classes, risk-mitigation strategies, and continual monitoring and reporting on portfolio performance. Financial advice is definitely not just a matter of picking the most recent hot stock, sure-fire fast-food chain, or the latest five-star golf resort “investment” in exotic locales.
2. What an advisor should give you
After you’ve had your one-on-one with your potential advisor, he or she should next provide you with a report that clearly outlines an asset allocation methodology that’s right for you. This is generally referred to as an “Investment Policy Statement.” It will outline your asset mix objectives, based on the adviser’s assessment of your true risk tolerance, your return objectives, any special investment restrictions or constraints you might have, and your time horizon. Depending on the size of your assets, the report will range anywhere from a few pages to the size of a typical issue of Vogue magazine. (Most of us won’t have to worry about the latter.)
If you don’t get such a report, or if your potential adviser serves something up scribbled on the back of a cocktail napkin, I’d advise exiting stage left…as fast as possible. Whispered hints about “really hot investment opportunities that only a select few people know about” are usually your first clue that you’re about to be taken for a ride…to the cleaners.
3. Expertise and independence
Your adviser should not be shy about displaying and explaining his or her credentials, affiliations, and experience. He or she absolutely must have access to top-flight investment research and should be willing to explain in detail who provides that research. In addition, your advisor should also have access to a wide range of investment choices, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs), accredited investments (those available only to investors with deep pockets), private pools, and so on.
An adviser providing the offerings of only one company may be quite competent and try do their best for you, but in the final analysis, this person is a really salesperson with one point of view. No single company always has the best product in all categories. It makes more sense to use an adviser who has no particular bias for one product in their selection methodology.
4. Ask about compensation
Your advisor must be absolutely upfront about how he or she is paid. An agreed percentage of annual assets under management is one fairly typical approach. But some advisors will tack on various charges, trailer fees, commissions, administrative fees, transaction costs, or “performance bonuses” in a contract. Always ask a potential adviser to disclose these kinds of charges, and always read any contract thoroughly before signing. If you’re a pop star with a giant recording contract, make sure a trusted lawyer vets everything before you sign. And even if you’re not, consider getting someone to take a second look at the fine print.
5. Use common sense
To most of us, this advice seems like it would be straightforward common sense. But that’s a commodity in rare supply in Southern California. Which is why if you take my advice for rising pop stars, you’ll be ahead of the game, whether you’re a pop star or not.
And, oh yes. The number 1 female entertainer on the Forbes list for 2013? Madonna, with annual takehome page of $125 million!
© 2013 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited.