If you weren’t paying attention, you’d think the Johnny Depp financial crisis was a plot right out of a Hollywood movie.
A multi-millionaire actor - no, it’s not Nicholas Cage – blows through $2 million dollars a month, and finds himself in danger of being buried in unsustainable debt, due primarily to bad advice the film star received from his financial advisor.
But it’s no movie script – this scenario actually happened to Depp, and it also happens to many Americans. U.S. retirees lose $17 trillion annually thanks to bad professional financial advice, according to the Associated Press.
Depp, whose earnings total $650 million, filed a lawsuit against The Management Group, a financial advisory firm he hired in 1999. The lawsuit accused the financial advisory firm of “engaging in years of gross mismanagement, self-dealing, and at times, actual fraud.”
Depp’s legal papers said he assumed his advisor “was behaving as a loyal fiduciary and prudent steward of his funds and finances.”
For its part, The Management Group denies the allegations, saying in a countersuit against Depp that it “did everything possible to protect Depp from his own irresponsible and profligate spending.”
The Depp lawsuit comes at a time when the Trump administration is looking to curb the so-called Department of Labor’s fiduciary rule, which seeks to mandate more transparency between money managers and their clients.
In all likelihood, the fiduciary rule wouldn’t have come to the aid of Depp, as it only covers money in retirement accounts.
Much to Learn
But there is much regular Americans can learn from the Depp vs. financial advisor donnybrook, money managers tell InsuranceNewsNet.com.
“There is a lot to take away from the Depp situation,” said Ted Jenkin, co-founder and financial planner at oXYGen in Alpharetta, Ga. “First, stay away from private investments. If a financial advisor is looking to sell you exotic products, investors should remember you don’t need to build a rocket ship to cross the street.”
Also, clients need make sure their financial advisor is a fiduciary.
“This way they put your best interest first, and make sure your money has a custodian that is a New York Stock Exchange, SIPC member,” he added. “It’s important to know your advisor has money with a legitimate custodian and legitimate statements.”
Also, make sure you have detailed notes for agreed upon goals, Jenkin said. This way, even with superstar clients, you are on the same page.
Others say Depp shares the blame for his financial woes, and that superstardom often triggers toxic financial practices.
“What makes them unstoppable at what they do professionally can also make them virtually unstoppable spenders,” said Russ Norwood, founding partner at Venturi Wealth Management in Austin, Texas.
“They’ve done well in life by not accepting limits. And while that may work for their craft, money is finite. Anyone, no matter how much you make, can run out of money.”
The key is to try and brake clients’ spending habits – or at least build a long enough paper trail to be able to prove you, as their financial advisor, were acting in their best interest, Norwood said.
Financial advisors should be proactive in dealing with clients prone to overspending and lax financial practices. There are also lessons to be learned in handling client cash, especially large amounts.
“You don’t structure finances based on the highest income earning years,” Norwood advised. “Extreme wealth generators often have big swings on their income, but baseline spending needs to be set in the income valley, not the peak. You can always splurge in time of plenty.”
If all else fails, walk away from a toxic relationship, he added.
“This applies to either party – the advisor or client,” he said. “All relationships go through rough patches and need constant maintenance. But if someone is headed for a tailspin, advisors need to understand the reputation risks associated with a high-profile collapse. Likewise, there’s nothing wrong with a client keeping an eagle eye on their advisor.”
The biggest lesson learned from the Johnny Depp fiasco is that an individual shouldn’t simply turn their finances over to a financial advisor.
“The relationship between a financial advisor and client has to be one of shared responsibility,” said Bob Johnson, CEO of the The American College of Financial Services, in Bryn Mawr, Pa. “The client must take some responsibility to understand what the financial advisor’s strategy is.”
The best client is an educated client.
“The relationship between a client and financial advisor must be based upon trust,” Johnson said. “But that cannot be blind trust. Remember, Ronald Reagan famously said ‘trust, but verify.’”
Lastly, money managers should draft a checklist they can use to keep relationships with clients up front and transparent. Lou Cannataro, a New York City-based financial expert and wealth advisor, offers a list of eight things financial professionals can learn from Johnny Depp's money problems:
• Plan based on in-depth continual conversations that dive into the client's mission, values and goals. If this is not the driving force behind the planning the relationship and planning is doomed to fail.
• The client must be involved in these planning sessions not just in the beginning but all along.
• There are no short cuts in planning and investments.
• Investing in a business or worse yet, multiple business, can be extremely risky and can lack the intense due diligence needed to make intelligent decisions.
• One must plan to determine how much return a client needs to gain and keep financial security.
• A high-net-worth individual may need a much lower return to maintain independence so don’t take on more risk than needed.
• An advisor must be straightforward with a client in terms of monthly expenditures and how they may be dismantling the well-thought-out personal plan.
• An advisor needs to be able to assist a client who is a business owner to be even more realistic with expenses and business forecast. It’s hard enough to keep personal planning on track, but business owners who lack day-to-day focus on operations can lose control even faster.
Sure, most people aren’t Johnny Depp, and don’t have $650 million in lifetime income that is slipping away.
But the lessons learned, as they apply to both financial advisors and their clients, are worthwhile. Following them may keep your client relationships open and strong – and unlike Johnny Depp, lawsuit free.
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at firstname.lastname@example.org.
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