News that Johnny Depp squandered tens of millions of dollars should be a lesson learned even for Main Street Americans living on a middle-class income.
First, some background. According to dueling lawsuits filed by the actor and his former financial advisors in January, Depp owns 14 homes, spends $2 million per month on non-mortgage expenses and even spent $20 million on a Hunter Thompson-themed party – all with the apparent approval, or at least knowledge, of his financial advisor.
While court documents provide investors a rare look at how the top 1 percent live, good or bad (his advisors say Depp blew through $75 million to purchase 14 new homes, for example), the legal wrangling also provides average financial consumers a telling glimpse into the importance of money management – especially when working with financial advisors with fiduciary responsibilities.
Here are five lessons for regular folks.
Always keep track of your income. One misstep by Depp and his financial management team was failing to keep accurate tabs on where the money was going and why. In that regard, there is plenty of blame to go around.
“One of a fiduciary’s primary roles is sometimes to save a client from themselves,” says William Stack, founder of Stack Financial Services in Salem, Missouri. “In Mr. Depp’s case, a financial advisor working in conjunction with an accountant should have been able to keep him spending prudently during lean years and splurging occasionally during good years. By monitoring balances annually with their advisor, a client should be able to prevent short-term anomalies from becoming permanent catastrophes.”
Living below your means isn’t just a cliché. Kevin Ward, president of Park + Elm Investment Advisers in Indianapolis, says that at any level of income, you still have to live within your income level.
“As the income goes up, it’s easy to let lifestyle creep set in. Spending adjusts higher with the higher income, including nicer cars, a bigger house and more toys. Without entirely knowing the Johnny Depp situation, someone should have had a tough conversation about the need to watch expenses,” Ward says.
“That probably never happened due to the fear of losing a client or confronting a powerful figure in Depp,” he adds. “But what really matters isn’t how much money you make – what matters is how much you keep, even if you make millions as an actor.”
You are responsible for your finances and your decisions. There are two sides to a client-money manager relationship, but in the end, it’s the investor who bears the burden of any negative financial outcomes.
“For an advisor to say, well, it’s your money and you can do whatever you want with it, that thinking flies in the face of the ideals involving stewardship and fiduciary practices,” says Justin Kumar, a financial planner with Arlington Capital Management in Arlington Heights, Illinois.
That said, people at all levels of the wealth spectrum come to an advisor for practical advice, not merely for validation of ideas.
“For clients to say, well, my advisor said I could make this decision even though it may not be the best course of action but I want to do it anyway, that notion negates personal financial responsibility,” he says. “Clients are not always looking for parents or disciplinarians when choosing an advisor, but they should be made aware of their full financial situation if not aware already.”
Be on the same page as your financial advisor. Larry Solomon, director of investment and planning at OptiFour Integrated Wealth Management in McLean, Virginia, says a middle-class American’s financial planning menu is basically a lot like Depp’s.
“We provide many of the same services that Johnny Depp’s advisors did, including financial, tax and legal advice and even bill-paying for some people,” he says. “Also, we’ve had clients with spending problems, often those who receive an unexpected windfall or inheritance, although thankfully none have been anywhere near Johnny Depp’s magnitude. But any regular saver and investor should know that a good financial planning process should include an analysis of the client’s income, savings, investments and lifestyle expenses to make sure they are cash-flow positive and on track to achieve their financial goals.”
Always watch out for fees and extra costs. “While most of us haven’t splurged on an entire French village, some of Depp’s money mistakes are actually quite common,” says Rhett Wood, a fiduciary advisor with Retirement Solutions in Oklahoma City.
One of Depp’s biggest mistakes is how much he’s spent on fees and penalties, Wood says.
“For example, his money managers collected over $28 million in fees that Depp says he never agreed to,” Wood says. “If you’re worried about paying fees or penalties, make sure you have a conversation with the advisor handling your money. They should disclose all fees to you and what those fees cover.”
As Solomon points out, Depp’s financial crisis could have been alleviated if he’d been more open with his financial advisors, and if they were more vigilant about curbing his indulgent spending habits.
“Financial advisors should be your guard dog, not your lap dog,” he says.
But the larger lesson is that, even in the case a global celebrity with tens of millions of dollars in the bank, it’s the common, oft-overlooked financial practices that lead to money trouble.
Article source: usnews.com