Helping hand lifts bizzers

Showbiz Wealth Management Report 2011

During the recent economic meltdown, a successful 45-year-old director with a mid-seven-figure portfolio — 60% of which was in stocks — saw his holdings drop in value by about 20%.

Against the advice of his financial adviser, Freemark Financial’s Steves Rodriguez, the anxious helmer sold everything and moved into cash, fearing that equities would continue to fall.

“There’s a visceral reaction,” says Andrew Meyer, another partner at Freemark, a Santa Monica business and wealth management firm. “You want to jump out of these things that have pulled back in value.”

In fact, stocks extended their decline. From the Lehman Bros. bankruptcy in September 2008 though the market bottom in March 2009, the S&P 500 index tumbled more than 40%.

At first it looked like the director had made the right move, but then stocks came roaring back.

“Changing strategy at that point just does not work,” Meyer says. “You’re going to lose all the upside.”

The director is still in cash today, having missed the entire 2010 market advance. Meyer notes that he’s the firm’s only client who didn’t fully recover from the 2008 decline.

“It’s very rare that making an emotional decision is going to turn out well for you,” adds Rodriguez. “At the end of the day, you want to be true to whatever strategy you employ.”

Although nobody could foresee the extent of the downturn, many wealth managers were getting uneasy well before 2008. Stephen Prough, co-founder and managing director of Salem Partners, a Los Angeles-based wealth management and investment banking firm, began telling clients in 2006 that “prices of certain assets were unsustainable.”

Prough’s clients were nervous, especially a 40-year-old entrepreneur who had sold his entertainment-related business for “tens of millions of dollars” just before the crisis hit.

By fall 2008, the firm had reduced the average equity exposure in portfolios from about one-third to 15%. “We didn’t miss all of the 2008 meltdown, but we missed a lot of it,” Prough adds.

The entrepreneur’s portfolio fell about 10%, but “we certainly made up for it the next year,” Prough says. The firm saw value in both convertible bonds and municipal debt, which had tumbled as investors across the country were forced to liquidate holdings to raise cash. Salem started to put clients’ money to work in those asset classes at the end of 2008. It also made opportunistic buys of stock options. That positioned clients for the market rebound, yet risked only the relatively small option premium.

For Jason Romano, a financial planner and partner at Moss Adams Wealth Advisers, protecting clients’ financial health comes down to structuring an asset allocation so that “regardless of what happens — whether it’s a good or bad market — you’re going to be OK.”

In 2008, Romano, who specializes in entertainment clients at the firm’s Los Angeles office, had a portion of clients’ assets in alternative investments that have low correlations to U.S. stocks. A small position was in a fund that could sell short, thus rising as stocks plunged.

Although clients suffered modest losses, says Romano, the key technique was to rebalance portfolios — selling part of a position that had advanced to buy more of an asset class that had declined.

One of Romano’s clients, a successful TV writer in his mid-50s, had a portfolio of 20% stocks and 80% bonds, mostly California munis. Although the muni market also sold off, Romano reminded the writer that he held individual bonds that would eventually mature at face value. (In contrast, bond funds have no maturity date.) Meanwhile, the income from the individual bonds would continue unchanged.

Romano reminded the writer, whose portfolio is in the range of $7 million to $10 million, they were not investing for that one year. The writer’s portfolio was rebalanced and recovered with the market.

“We highly encourage clients to continue adding money to their investments,” he says.

Financial advisers say entertainment industry clients can’t be lumped together as one group. While studio execs have a steady paycheck, talent often lives from job to job. Having a large cash cushion is imperative for someone with a variable income stream.

That can limit the amount of money available for investing in stocks or other “risk” assets. “I don’t put any money in that they’re going to need within the next three years,” says Rich Winer, prez, Winer Wealth Management in Woodland Hills, Calif.

The intensity of showbiz can also affect the money management process. “I find that entertainment clients are so focused on their careers they are not following their financial stuff as closely as other clients,” adds Winer.

He and other advisers who work with showbiz pros try to overcome that with frequent communication.

But the key is having that plan. “If we can avoid losing (much) money in these big market declines that come every three to five years, then we don’t have to take as much risk during the bull runs.”

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