Monday, July 12, 2010
We have all heard stories about successful entertainers who have struggled with money. Last year, the actor Nicolas Cage filed a $20 million lawsuit against his business manager, contending that poor advice left him with a multimillion-dollar tax bill and a string of poor real estate investments that had to be sold at a loss. But it quickly became clear that he had also been living far beyond his significant means for years.
What about the artists who quietly amass fortunes and manage them well? How do they do it, and what can the rest of us learn from it?
The shrewdest musicians, artists and actors, their advisers say, have conservative investment profiles, often in contrast to their glamorous public personas.
“We find that generally artists are pretty intuitive as to what to do with their money,” said Leslie Lassiter, head of the New York region for J. P. Morgan’s private wealth management division. “They know, ‘I may not sell another one for a while so I want to stay in cash.’ ”
So while not every artist is starving, most do not steadily earn money. That puts a premium on their ability to manage what they already have, realizing that just because they may have earned $15 million one year does not mean they will earn that the next year or the year after that.
Framed this way, the biggest financial issue for wealthy artists — from musicians to painters to writers — is much the same as for people who earn the bulk of their income in bonuses or find themselves with a windfall of money from an inheritance. And lessons from how artists manage their windfalls can help others through their ups and downs.
The cable show “Entourage” has shed light on the world of celebrity hangers-on. The problem is when those friends become financial advisers.
The extreme of that is Kenneth I. Starr, an adviser to many celebrities, including Sylvester Stallone and Martin Scorsese, who was charged last month with stealing at least $59 million from clients. The more common challenge is not outright fraud but benign incompetence.
“What I have found is many musicians have terrible advisers — myself excepted,” said Jane King, president of Fairfield Financial Advisors, who has several clients who are musicians and authors. “They become part of the entourage and they end up doing the taxes. They’re lovely people, but they would never be mistaken for someone from Deloitte.”
The artists may argue that they have little interest in discussing money, and that certainly is not an issue limited to them. “It’s a real challenge to get their attention,” Ms. King said. “Do they want to sit down over lunch and talk about their money? No, because the money coming in can be so sporadic.”
Russ Titelman, a music producer who has won three Grammy Awards for recordings he did with Steve Winwood and Eric Clapton, said he was more comfortable talking about the new musicians he was working with than about his finances. But since leaving Warner Brothers in the late 1990s to become an independent producer, he said, he has become more aware of managing his money.
“I’m much more involved now,” said Mr. Titelman, 65. “Of the old guard, many of us don’t work as much as we used to.”
Still, he added: “The money part is what comes after the creative part. If you’re out working with very talented people and you make good music, that’s the way to generate income.”
While the sentiment makes sense on some levels, it is not always realistic. Aaron Schindler, a managing director at the Wealth Advisory Group who has built his practice serving artists, including Mr. Titelman, said getting his clients to understand the big picture was often the greatest challenge. “It’s a left brain-right brain thing,” he said.
Regardless of how much money an artist is making, the key is almost always cash management. That big payment from the concert tour or the gallery show needs to be managed conservatively to cover everyday expenses as well as future endeavors.
Ms. Lassiter said artist clients should have two years of expenses in cash as opposed to six months for a regular high-net-worth client. She added that the bulk of an artist’s portfolio beyond that should be in income-producing assets, like dividend-paying stocks and bonds.
“A significant portion of their wealth is in their body of work,” she said. “It’s hard to put a value on that.”
Of course, there are those who want to be rock stars on stage and as investors, a combination that can end in penury — and dreams of regaining their financial solvency with a comeback.
“It is our job as strategic advisers to make them aware of all scenarios,” said Ida Liu, managing director at Citi Private Bank. “We model out the risks for the best-case scenarios, the worst-case scenarios and the likely outcomes.”
With this, Ms. Liu said, artist clients have a clear map in front of them that shows the consequences of their decisions.
And while fraud is always a possibility, the bigger risk is what happened to Mr. Cage and, for that matter, any number of sports stars, who find themselves heavily indebted despite earning tens, if not hundreds, of millions of dollars.
“I have big movie producer clients who are not working as much as they used to,” Mr. Schindler said. “I often tell them, ‘You could run out of money if you continue to live this luxurious lifestyle.’ That’s the hard part for them, understanding how they can compromise with lifestyle expenses.”
The one certainty with artists is that financial dry spells will come — Mick Jagger excluded — and that careers may be shorter than anticipated.
Ms. King said she was working with a musician who was popular in the 1980s but had not had a hit in America in quite some time. His band is planning a big European tour, and she is advising him to put a substantial part of the earnings into a defined-benefit plan. While this is more complicated and costly to set up than other retirement plans, it can allow flexibility in setting an earlier retirement age.
“I can say his retirement age, because of his profession, is 50, and I can fund to a benefit of, say, $5 million at age 50,” Ms. King said. “Then next year, no income, no deposit because it’s based on earnings.”
So artists, like anyone else, need to be shrewd about windfalls.
Still, Ms. Lassiter recalled the story of one artist client who sold a painting after many years. When she asked how he established a price for it without any sales to compare it to, she said he told her, “It was as much as I needed for my daughter’s education.”
That was the right price. But a bit of planning is always safer.
Posted by tha artivist at 5:19 AM