With Business Managers, Nothing Can Replace Checks and Balances

Taking note of the odd scandal, clients want assurances that their money is safe

Leonard Cohen

Can I trust these guys with my life’s savings?

That’s a hot-button topic for Hollywood talent and executives, after some unsettling incidents involving their money handlers.

“It seems like every few years a bad story about a business management relationship comes up,” says Harley Neuman, founder of Neuman + Associates. “And each time the issue is something different.”

Hollywood is a world unto itself, with its own cadre of specialists who handle the affairs of the entertainment industry’s creatives and executives. They deal with banking, bill paying, budgeting, taxes (including the claiming of deductions), insurance coverage, big-ticket purchases such as cars and homes, and retirement planning.

Industry pros say some basic checks and balances can offer protections to clients in their business manager relationships. For example, engagement letters — the relationship agreements signed upfront — are a one-time task that merits close review, including scrutiny by an independent attorney.

Experts say to watch for business managers wanting overly broad relief from being held responsible for certain circumstances. Engagement letters are subject to negotiation, including crossing out passages and inserting text.

Another safeguard: requiring bank-withdrawal checks to be co-signed by third parties. “Having the client’s attorney, personal manager, agent or even brother sign checks is good,” says Eric Wasserman, managing partner at WG&S. “It adds a layer of oversight and controls.”

Another best practice is a structure within business-manager firms themselves requiring more than one signature on client transactions. Spreading around responsibility means, “if something was amiss, any misuse would be red-flagged,” says Arnie Herrmann, partner at Citrin Cooperman.

But checks and balances of internal controls can be tough for prospective clients to evaluate, adds Mickey Segal, managing partner at Nigro Karlin Segal Feldstein & Bolno. “You have all different types of arrangements in the industry.”

Business management companies generally carry several types of liability insurance that would pay off client losses: Besides omnibus professional insurance, there’s malpractice (covering errors), identity theft, business interruption (such as records loss in a disaster), and employee dishonesty.

Employee dishonesty seems an obvious category for protection, but it often excludes top-level partners and principals. Prospective clients can request proof of coverage.

When looking for vetting within the accounting profession, the certified public accountant credential is a key accreditation. CPAs have passed peer reviews and tests and are licensed by states. Not all accountants and business managers are CPAs.

A client decision with big ramifications is entrusting broad powers to any third party with power of attorney, which grants authority that usually is wielded by clients. PoAs can be narrow or broad, and clients can tailor them to their needs and trust levels.

Finally, clients can get a second opinion and arrange third-party accountants to audit their finances, although this will be expensive. Typically, all client finances are reviewed, including elements not directly controlled by business managers, such as insurance coverage.

Most checks and balances add costs and hassle to transactions. “In today’s fast-paced world, it’s an important and necessary evil,” says Michael Kaplan, partner at Miller Kaplan Arase. “If things take a
little longer, so be it.”

Over the years, there have been sporadic instances of business managers accused of misconduct. For example, in 2004 singer Leonard Cohen fired and sued his business manager, accusing her of emptying his account. He prevailed and the court awarded him millions of dollars. Earlier this year, singer Alanis Morissette sued her business manager for $4.7 million, charging misuse of her funds.

But not all such cases are clear-cut fraud. Sometimes, for example, clients spent lavishly, pushed transactions that later soured, or concealed some financial transactions in, for example, divorce situations.

Traditionally, riskier client-investing work is outsourced to stockbrokers and investment advisory firms, which liaise with the business managers handling more basic finance administration for the same clients. Some business managers offer stock picking advice.

The investment advisory scandal of the era is the $18 billion Bernie Madoff ripoff of 2008, involving many Hollywood victims.

Relationships with investment advisers who are judged on and may get replaced based on performance of investment portfolios — are not nearly as long-lasting as those for business managers, who handle less-speculative finance activities. There’s also a closeness because business managers routinely receive check signing authorization, which is necessary to conduct basic bill-paying functions.

It’s often tempting to think that sending business manager statements to other professionals on a client’s team — such as a bank, manager, and lawyer — is a strong safety net. But many finance pros disagree, saying those professionals lack an accountant’s expertise to detect irregularities.

Further, such individuals on a client’s team might misuse client funds, which is hard to detect if they have a finger in the pot. “And there are probably some transactions of a personal nature that clients just don’t want their whole team to know about,” says one financial exec.

(Pictured above: singer Leonard Cohen, who sued his business manager in 2004)