Most people understand the spending impulse that comes with a tax refund or a rebate on a car or major appliance. It’s hard not to spend it all at once.
Imagine the self-restraint needed if you received a multi-million dollar signing bonus or advance from an employer? It’s the blessing and potential curse that professional athletes, musicians and other celebrities wrestle with when they reach a certain level of success.
Coming into a lot of money at once can trigger what experts call “sudden wealth syndrome,” an affliction of people who have trouble adjusting to the quick shift from penny pinching to privilege. It often leads to overspending, and can sometimes leave the person worse off financially than before they hit the big payday.
Investing for the long game and building a balanced portfolio may not be very sexy, but it could set you up for a more certain future.
Planning for tomorrow
“It all boils down to cash-flow planning from day one, all the way through retirement,” says Paul DeLauro, a Beverly Hills-based senior vice president and manager of wealth planning for City National Bank.
Unfortunately, too often, people who make large sums of money quickly can lose it almost as fast if they don’t manage it properly – celebrities included. Well-publicized examples include boxer Mike Tyson and David James, the ex-England goalkeeper.
Career changes can also leave celebrities cash strapped. Consider that an injury can end a professional athlete’s career in an instant. A musician’s second album may not be as successful as the first.
Sudden wealth can be a problem in particular for younger celebrities, many of whom will likely have a longer retirement timeline to fund and less knowledge of investment management to fall back on. Older sports, media or entertainment professionals can also have trouble adjusting to a different lifestyle once they stop playing or touring, with less or no money coming in.
An investment plan is likely the last thing celebrities and athletes want to worry about after making it big. Still, DeLauro says more are realizing the importance of building a conservative, balanced, and professionally managed portfolio, especially after seeing so many of their peers lose large sums of money on risky bets and so-called “guaranteed returns”.
Of course, some never learn, which is why DeLauro believes it’s up to the financial services industry to better train them for the long game of life.
The “Entourage” effect
One of the biggest challenges athletes and performers have is managing pressures within and around them to act the part of the celebrity.
“It’s the Entourage effect,” says DeLauro, referencing the HBO TV show about four buddies navigating the life of Hollywood’s rich and famous. “It’s cliché, but nonetheless true.”
DeLauro believes celebrities should enjoy their newfound wealth, while also saving and investing for the future. That means allowing themselves to buy a few toys, like a flashy sports car or a yacht, within reason.
“They should retain some play money,” says DeLauro. “They will benefit from the emotional outlet that comes from buying some fun stuff. It’s true for all of us,” within our own financial means.
But he says celebrities need to be on alert for what DeLauro calls “creditors, predators and thieves” that are looking to take advantage of their new financial status. Many celebrities and athletes have lost huge sums of money they entrusted in people or investment schemes they believed were legitimate, and in some cases made them feel like they belonged to a special class of investor.
Consider some celebrities, just a handful of the rich and famous, who lost millions by investing their money with Bernie Madoff, only to discover that it was all part of a multi-billion dollar Ponzi scheme.
“Be highly skeptical of everything. Question everything,” DeLauro says. “Surround yourself with a team of professionals with different incentives, all working for your best interest. Build a plan to protect your wealth if you want to be successful.”
Wealth preservation ‘trumps everything’
For celebrities and athletes who make large sums of money up front, and aren’t sure how long their success will last, the focus should be on wealth preservation, says Jonathan Gold, director of RBC Wealth Management International in London, United Kingdom.
“They’re earning far more than anyone could ever make for them in a financial services organization,” Gold says.
As a result, they should seek investment advisors and relationship managers who can maintain their purchasing power now, and in the future. That includes their rainy day fund, retirement fund and establishing a portfolio and estate plan so future generations may also benefit.
“It’s about protection of current and future wealth,” Gold says.
They also need to diversify their assets, like all other investors should.
“Too many assets high-risk and are correlated to each other. If one goes wrong, they all go wrong,” Gold says. “They may have a number of different investments that sound interesting and fun, but do they have the right people that can step back and view the bigger picture?”
DeLauro recommends his clients treat the lump sum they receive from a bonus or contract as though it’s the only income they’ll ever earn. That means spending and investing it wisely, for the long-term.
“It’s about building a nest egg, not blowing it,” DeLauro says “Wealth preservation trumps everything.”
The value of the brand
To drive home his point about protecting and preserving wealth, DeLauro says he often highlights to clients the economic value of their personal brand. It can be an incentive to make prudent investment decisions
“They should focus on cultivating their brand,” DeLauro says. “If they can focus their behavior on the economic value of their image, they will be successful.”
Some celebrities try to build their brand through side business investments, such as restaurants or clothing and accessory lines. While it has been hugely rewarding for some such as Paul Newman and his salad dressing, or Victoria Beckham and her fashion house, the risk of losing the money is high.
Of course, many celebrities also engage with philanthropic causes as a way of giving something back to their communities and bringing added value to their personal brand.
“Social capital can be just as important as the actual capital,” says DeLauro. “ A lot can be done to stroke the ego, but doing good for the community is also good for the soul.”
There’s a lot of good that can come from reaching the top of your game, including the wealth that comes with it. The key is managing it in a way that makes you look back on your legacy with pride, and no regrets.