Building & Preserving Your Wealth

CJMCharles Massimo Photo 2013Building and Preserving Your Wealth

By: Charles Massimo – CEO of CJM Wealth Management (, one of the nation’s leading wealth management firms, and author of “Getting Off The Street – Sane Investment Advice from One of the Nation’s Leading Wealth Managers.”

We have all heard of people about whom it is said, “He or she just can’t seem to hold onto their money.” We also know of very wealthy people who fall in this category and who have lost fortunes. Many of them are those who become suddenly wealthy – professional athletes, actors, trust fund babies and others who inherit large sums. Some of their stories are legendary and incredulous to many who can’t imagine starting with millions, losing millions and in the worst cases, ending with close to nothing. All had one thing in common, the failure to have a well-designed and managed investment/financial plan to help them preserve their wealth. Understanding the problem and how pervasive it is, and what it takes to avoid this outcome is essential for all individuals, but especially for the suddenly wealthy.

“The Mighty Fall Hard”

At his peak, actor Nicholas Cage was earning up to $40 million per year, but his expensive taste cost him millions and in 2012, he was still paying back taxes. Former Major League Baseball Player Curt Schilling earned over $140 million during his 19-year career, but filed for bankruptcy. With assets of $52 million, filmmaker Francis Ford Coppola filed for bankruptcy for a second time. In 2014, boxer Floyd Mayweather earned $100 million. He was said to spend in the area of $75 million a year, and today, despite an estimated worth of $295 million, was reported to possibly planning to file for bankruptcy. Also from the world of boxing, Mike Tyson earned $400 million over his 20-year career but in 2003 was $23 million in debt and filed for bankruptcy. Former National Basketball Association star Dennis Rodman, Rapper MC Hammer, actress Kim Basinger, musician Meat Loaf, and even Michael Jackson are among the countless other high profile “wealthy” individuals have faced serious financial problems.

Professional athletes, in particular, typically fall prey to their short window of high earnings during which time many fail to plan for the future. They live lavishly and spend freely without any financial/budgetary controls, investment strategies or wealth management plan in place. Subsequently, as their earnings come to an end, they find themselves unprepared to sustain the lifestyle they have grown accustomed to or, begin incurring great debt and ultimately, significant losses. A joint study conducted by economists at the University of Kentucky, University of Pittsburgh and Vanderbilt University and reported on by Sports Illustrated found that, within two years of retirement, 78% of former National Football League (NFL) players are bankrupt or experience significant financial difficulties.

Similar findings can be traced to studies of second and third generations where substantial wealth transfers resulted in entire families losing full control of their assets the first generation after the transfer of wealth. Heirs, who, with better plans in place, would have been continuing to live their lives of luxury, suddenly found themselves having to liquidate their family jewels and heirlooms and pursuing “work” in a manner they previously did not. Of course not all noteworthy affluent families find themselves in this situation. There are many examples of families that have retained their wealth through centuries such as the Astor, Rockefeller and Rothschild families.

Whether you are a professional athlete, successful entrepreneur, professional, physician, actor, musician, a member of a wealthy family or one of the two-thirds of all baby boomers slated to inherit their share of the estimated $7.6 trillion in family money to be transferred to them (according to the Boston College Center for Retirement Research), the right investment/financial plan and wealth management strategies are essential.

“The Wealth Management Plan”

In order to build and preserve wealth, a wealth management plan is essential. It begins with a discovery process led by a financial advisor/wealth manager. This professional will raise over 60 specific questions designed to determine the individual and his/her family’s values, concerns, dynamics, issues and top priorities. During the Discovery Meeting, the financial advisor/wealth manager will be recording the individual’s responses so that it can be presented back to confirm its accuracy. The information is then applied by the financial advisor/wealth manager and his team members in the development of the investment plan and investment policy statement (IPS), which serves as the foundation for the wealth management plan. A second meeting, Investment Plan Meeting, is schedule wherein the wealth management plan is presented. It includes:

• A financial plan; an overview encompassing elements relating to wealth transfer, distribution and preservation using such tools as trusts, insurance, etc.
• An investment plan conveying the asset allocation strategy being applied to meet the individual/family’s goals.

Once the plan has been accepted, a mutual commitment is held at which time the wealth manager provides various forms and documents for the individual/family to complete for the consolidation and transfer of assets (i.e., bank accounts, retirement plans and investments) to the financial advisor/wealth manager. Approximately 45 days later, there will be another meeting to confirm that all of the necessary account documents have been completed and to review the plan. In addition, advanced planning meetings with other trusted advisors (i.e., lawyer, accountant and insurance professional) would be held to advise the individual/family regarding the plan’s legal, tax and insurance components. Going forward, the financial advisor/wealth manager continues to monitor and manage all aspects of the plan working in concert with these other trusted advisors. Regular quarterly, semi-annual and annual meetings are held to maintain communications and to address any life changes that make require making an adjustment to the wealth management plan; either the financial plan or the investment plan. Among the life changes which will trigger a possible modification to the plan are such events as:

• Marriage
• Divorce
• Birth of a child
• Accumulating new assets (e.g., real estate, collectibles)
• Becoming a business owner
• Retiring

In the case of an individual who becomes a business owner, consideration would be given to redeveloping the plan to integrate the individual’s personal and business financial goals. It is important that all business owners make provisions to address other needs relating to their business, including:

• Business continuity and contingency plan
• Funding, cash flow and liquidity considerations
• Risk management for the business
• Exit strategy
• Succession plan
• Planning to meet the owner and the business’ financial needs through the company’s various stages of growth, maturation and transition

“Structured Investing”

The most effective wealth management plans will rely on a structured investing approach which follows the Fama-French Three Factor Investment Model and key portfolio principles of rebalancing, diversification and asset class allocation. The Fama-French Three Factor Investment Model considers: (1) the amount of stocks vs. bonds, (2) the company size bias (smaller companies typically outperform larger companies over the long term) and (3) the portfolio’s allocation toward “value” vs. expensive growth stocks. The rebalancing of an investment portfolio is accomplished with the selling of assets that have risen in value and buying of more that have dropped in value. This serves to bring a portfolio back to its original target allocation thereby easing volatility and retaining the portfolio’s strategic structure designed to support the investor’s long-term goals. The diversification principle refers to the combining of different assets to provide the highest expected rate of return at each incremental level of risk based on mathematical calculations. Finally, through effective asset allocation, an investor is able to gain full benefit from a “buy and hold” strategy through which risk and reward is spread out within and across various asset classes.

This structured investing approach not only helps minimize volatility and enhances the expected return on investments, but it is far more cost effective than investing approaches which chase the “hot” stocks of the day and inflict transactions on investors which benefit the investment bank far more than the investor. It is estimated the average fee for building a portfolio following this structured investing formula is 40-60% less costly than the typical Wall Street investing approach.

Keep in mind some core assumptions behind the structured investing approach:

• You cannot control or time the market.
• Individual stock portfolios can never reach the full potential of the market whereas an efficient portfolio (achieved following the Fama-French Three Factor Model and rebalancing, diversification and asset allocation) can
• Investors should expect transparency in terms of the fees associated with their investments.
• An investment portfolio should be designed to meet the specific financial goals of the individual and his/her life circumstances.

Historical data has shown that, the Fama-French model has outperformed the Standard & Poor’s 500 (S&P 500) 98.7% of the time for any 25-year period, since 1927. Only one percent (1%) of the nation’s 250,000 advisors uses this model.

“Cautionary Tales”

Across the fields of professional sports, arts and entertaining, and even high-flying business sectors, there are stories of once very wealthy individuals who subsequently fell upon hard times. A recent report by Newsday, following a survey it conducted of former NFL players in conjunction with the National Football League Players Association confirmed this finding relating to former big name players. Cited were their careless spending, poor investments and business deals. Undoubtedly, many also did not have the proper guidance and advice nor a sound wealth management plan designed to support their long-term goals. An experienced wealth manager, who puts his clients’ needs first, follows a prudent, proven and disciplined investing model, and meticulously manages their portfolio and monitors their overall plan can help the suddenly wealthy and others with significant assets to preserve.