Financial strategy

How to Form a Winning Financial Strategy

The best defense for your wealth is a strong offense

Lately, I’ve been seeing too many stories about professional athletes finding themselves in financial distress and victims of investment scams.

From my position as a wealth manager, I can see why. I advise not only athletes, but also entrepreneurs and others who suddenly come into a large fortune. As fast as the money swarms in, so do self-interested people hoping to benefit from that success.

For example, a recent “60 Minutes” episode reported on how several National Football League players lost $43 million in a bad investment. This story, while terrible, happens too often to professional athletes. Reportedly, 78% of NFL players go bankrupt or experience financial distress within two years of retirement.

What made the “60 Minutes” story particularly sad is that the players relied on an advisor who was listed on their players association’s website. They trusted their union would be looking out for their best interests.

However, the only financial representative that is legally obligated to work in your best interest is a registered investment advisor, or RIA. Some of the players took personal responsibility for their own losses. To some level, it is true that you as an investor make decisions at your own risk. But it’s also true that you should be able to rely on the people you pay to guide you in the right direction and not scam you.

Whether you’ve recently signed a multi-million dollar contract, or still aim to, here are four basic things you can do to hire the right financial professionals and avoid the pitfalls common to so many successful dream-catchers who find sudden wealth.

1. Build a dedicated, talented team

You already know that an all-star player is just one part of a winning team. You need pros in other positions working together to score.

When it comes to financial success, this concept also applies. To help you plan and reach your financial goals, you need several players: an investment advisor, a tax accountant, lawyers and an estate planner, for starters. If you want to go into a specialized venture, you should also have experts in that field.

All of these professionals need to make you the center of their attention. You should feel comfortable being able to discuss and share ideas with each and every one of them. They should work together for you while also watching for potential conflicts of interest that benefit someone else.

Together, these experts can help you create a robust and far-reaching financial plan and make sure that your salary, bonuses and investments are working toward your goals. One easy way to get all of this expert advice is to find a fee-based RIA that has all or most of these disciplines in one house.

And don’t forget the referee; every game needs one. In the case of your money, that should be a third-party custodian. Don’t ever just hand your investment advisor a large check, tell them to invest it and walk away. It’s ok to give an RIA authority to act on your behalf, but someone else should be tracking your accounts.

2. Know the players and the field

It’s not always easy to tell who is going to be a fair player. Personal recommendations, a long track record, and third-party references and testimonials are good places to start. But, like in the case of the football players on “60 Minutes,” even trusted sources can be wrong.

Once you know you are financially secure enough to meet all of your life goals, then you can consider riskier ventures with surplus funds.

You still have to do your own homework. Make sure your advisor has the right experience and credentials. Designations such as Certified Public Accountant (CPA) or Certified Financial Planner (CFP), while not necessary, help to signify a specific area of expertise. You can also easily check with the Financial Industry Regulatory Authority (FINRA) and Securities Exchange Commission to see if the person or firm you want to work with is registered and has no record of complaints or disciplinary actions.

In the end, the best way to ensure that your team is working for you is to stay in the game. You should always know how much money you have, where it’s invested, and where you are in terms of reaching your goals. Remember, even if you have someone investing on your behalf, you are still in control of the field.

3. Play a strong, defensive game

There are too many stories of athletes investing heavily in one or a few big ventures. If they flop, there is no back-up plan. Don’t forget the top three best practices when investing: diversify, diversify and diversify. Having a balanced portfolio spread across asset classes, geography, company size and industries is the best way to manage volatility. When one part of the market is down, another is usually up, and you should see growth over time.

An RIA can help you create a solid game plan to meet short-, mid- and long-term goals — whether they include buying expensive homes for your family, sending your children to exclusive schools, or starting a business as part of your second career. An advisor can then work with you to set up an appropriate investment portfolio. Once you know you are financially secure enough to meet all of your life goals, then you can consider riskier ventures with surplus funds.

4. Don’t go for the glitter when reaching for gold

It may be cliché, but there’s no getting around it: If it sounds too good to be true, it probably is. The greater reward you seek, the higher the potential risk.

I’m not saying that every high-reward investment should be avoided. But each one should be considered carefully and made only with professional investors who have a consistent strategy and track record over the years. Just like you can’t let emotions take control of you during the game, you can’t let your emotions control your decisions on risky investments.

If someone comes to you with a private investment opportunity, ask what his experience is with this type of investment. If he comes back saying he’s been in a particular asset (such as real estate or car dealerships) for X years, find out the track record. Did professional or institutional investors work with this person in the past? Does the dealmaker have his own money invested? Try to get testimonials from other past investors.

Make sure you fully understand all the risks by getting the appropriate disclosures, prospectuses and participation agreements up front. Have the lawyers on your team review them. Ask your investment advisor what would happen if you were to lose all of your money in this deal. How would it impact your current lifestyle and future goals? What are the fees associated with the transaction; are they reasonable?

Most of all, don’t fall for the emotional trap of following your friends or idols into an investment fund or project. Even if it is a solid opportunity, that doesn’t mean it’s right for you at this time. If you’re not sure of what you’re getting into — just because you love eating doesn’t mean you know how to run a restaurant chain — be sure to have somebody on your financial team who is.

The end game

Keep in mind, nobody has a track record that works 100% of the time. Just like an athlete can’t guarantee his or her absolute best performance in every single game, even professional investors lose money on some investments. If someone has a proposal to make you wealthy based on one investment — as alluring as it may sound — think long and hard about the risks and what might happen if the investment does not turn out as promised.

You can only control what you know. By assembling a winning team that is truly obligated to operate in your best interests, doing your research, remaining diversified, and paying attention to where your money is and what it’s doing, you can better defend against some of the misfortunes others with newfound wealth have experienced and reach your goal line.

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