Why Johnny Depp and Mike Tyson Sued their Advisors

Although most financial advisors meet either the suitability standard or the fiduciary standard when it comes to dealing with clients, there is always a small minority who choose to act in their own best interests, and many of them have paid a stiff price for doing so. Johnny Depp and Mike Tyson have recently filed lawsuits against former financial advisors and business managers, claiming these folks used their money as their own and grossly mismanaged their assets. What can we learn from their mistakes?

The Washington Post reported that one of Tyson's former financial advisors took around $550,000 from him and used the proceeds to pay for hotels, gambling, dental work, private school tuition for a girlfriend’s relative and tanning services. The advisor pled guilty, was forced to repay this amount and sentenced to 33 months behind bars in 2017. (For more, see: Celebrity Financial Failures.)

Johnny Depp's former business managers allegedly engaged in both mismanagement and outright fraud, and he sued them for $25 million in a 2017 filing. The filing states that the managers paid themselves nearly $30 million in contingency fees without a written agreement and also failed to file and pay taxes on time. The ex-managers filed a counter-complaint. As of mid-2018, the case was still pending.

Of course, this is hardly the first time that unscrupulous business partners and financial advisors have taken advantage of celebrities and athletes, or that famous figures accused their managers of doing so. But it does broach the topic of the level of responsibility that is owed to clients by their financial advisors, regardless of the amount of money in question. Ethical financial advisors should be willing to furnish the following information to their clients at the beginning of their relationship:

• A complete breakdown of all fees and expenses that will be charged
• A specific, itemized list of services to be provided and the circumstances under which they will be performed
• The advisor's complete background history
• The broker-dealer that the advisor works for (if applicable)

Ethical advisors must also follow a strict set of rules when it comes to managing client funds. Under no circumstances can the advisor commingle client funds with their own (unless perhaps the client is an immediate family member). They are likewise prohibited from generating transactions for their clients without prior authorization unless they have been granted power of attorney or a discretionary trading authorization beforehand. And the transactions that they generate have to be in the clients' best interests. They cannot perform a transaction simply for the purpose of generating a commission. (For more, see: Ethical Issues For Financial Advisors.)

Advisors who have what is known as a fiduciary duty to their clients must also disclose any possible conflicts of interest that they have to their clients before entering into any sort of agreement. A breach of this duty occurs when the advisor fails to put your interests ahead of his or her own or acts in an unethical fashion. A breach of fiduciary duty can include committing securities violations, providing false or misleading information or failure to adequately handle or supervise the handling of client assets.

However, advisors do have the right to defend themselves if you take them to court or an arbitration hearing. If you feel that your advisor has shortchanged you in some fashion, be sure that you can gather written evidence to that effect (i.e. documentation of actual transactions that were performed versus what the advisor said he or she would do in the initial client agreement). Although a mere verbal claim may stick on the advisor's record, it probably won't be sufficient to grant you monetary restitution.

Even financial advisors who are not technically held to a fiduciary standard are still required to make suitable investment recommendations and handle your money in an ethical and professional manner. Those who are held to a fiduciary duty are required to unconditionally put your best interests ahead of their own in all of their business dealings. (For more, see: Top Celebrity Investors And What They're Invested In.)