Why smart people make bad financial decisions.

When the internal revenue service rolled through the gates at comedian Redd Foxx's Hollywood house some years back and confiscated all his personal belongings, down to his king-sized bed, people wondered, "How could he let it happen?"

This scene has been replayed over and over again. When Sammy Davis Jr. died, his widow cried broke. When Joseph Jett, former Wall Street trader at Kidder, Peabody, was fired and his accounts frozen, people wondered why all of his money was in one account. The answer is simple: Smart people can make bad financial decisions.

The late and great aren't the only ones who make financial missteps. For example, individuals whose holdings are all in short-term liquid investments may not be earning the best return in the long un. On the other hand, keeping all your holdings locked up in illiquid investments will prevent you from getting your hands on cash when unexpected needs arise.

According to an informal poll of investment professionals, the three most common mistakes in money management are: (1) Not taking enough time to do your homework. This includes researching who is going to handle your money, what kind of control over your finances you are going to retain and what your specific goals are. (2) Not taking advantage of obvious opportunities, such as the 401(k) employee savings plan at work. (3) Not adequately planning for the passing on of wealth.

Most people make, what we call in retrospect, dumb financial decisions because "They just don't know any better," says Willie Daniels, founder and CEO of United Daniels Securities in New York City (No. 11 on the BLACK ENTERPRISE INVESTMENT BANK list).

"Ignorance about what finance is, how the system works, what they specifically want out of the system, and how to maneuver through it, are all key factors," he continued.

Gwendolyn Kirkland, a certified financial planner with American Investment Services in Matteson, Ill., agrees: "I have people who come to me and say, |I want to make money.' Well, that is not enough. The first mistake is not having a written financial goal."

Without considering a specific time frame and acknowledging your capacity for risk, you compound your mistakes. Kirkland adds, "All of that should be discussed with your financial planner before you write a check and start to invest in anything."

BONDING WITH YOUR PLANNER

Not picking the right financial planner is another common mistake a lot of people make, Kirkland notes.

"It's a proactive process," she explains, "Like picking a doctor or shopping for a car, you have to talk to other people about the professionals you are considering."

In choosing a financial planner, you'll want to know how long they have been in the business and, most importantly, if the two of you are compatible in terms of style, goals and objectives.

Whether a full-service broker or a discount broker is better for you depends on how much work you're willing to do and what your investment goals are.

"If, for example, you are buying a mutual fund, you may not need the services of a full-service broker," Kirkland explains. "If you are willing to do the work [researching and individual stock watching], then a discount broker may be fine." But, she cautions, you'll be on your own. "You're giving up expert advice from a professional who knows you."

"Take the time to interview a broker or money manager," Kirkland strongly suggests. "After all, this person is handling your money. Don't you think you should have a personal relationship with him or her?"

The answer is a resounding yes, concurs Melvin Murray, director of claims at Atlanta Life Insurance Co. "Ideally you want someone, whether [he or she] is in the insurance field or in some other type of money management, who not only takes your calls and is responsive, but who will take time out to call you once in a while," Murray says.

IT'S NEVER TOO EARLY TO START

One of Murray's pet peeves is that people don't start investing early enough. "When you're in your 20s you're probably in the best physical condition of your life. You can probably get a suitable policy from any insurer. Your premiums will be lower and you will have a longer time for your savings to accumulate," he says.

"On the other hand, if you wait until you're in your 40s and 50s to get coverage and think that you are going to have a chance at accumulating wealth before you retire, it's going to be tough.

"The older you are, the more stringent your physical examination will be. The premium you'll be forced to pay will be much higher than if you had started earlier, and you'll have less time to accumulate any wealth," he concludes.

"By far one of the biggest mistakes you can make is not taking advantage of the 401(k) program at work," Kirkland notes.

"As soon as you're able to, it's almost a no-brainer to contribute to the maximum. Number one, the contributions are taken off the top [automatically deducted from your paycheck], so you're actually saving money that you never see. Number two, your employer usually matches your contribution."

SHARING THE WEALTH

Whether they specialize in insurance brokerage, financial planning or investment banking, all our experts agree that another one of the biggest mistakes people make is not making adequate provisions for passing on their wealth.

"A lot of people aren't aware of it, but there is something very wonderful going on right now. As a people, we are at a stage where we have held jobs and positions for a long enough time so that we can now retire," explains Kirkland.

"With that retirement comes money for retirement plans, IRAs, pension funds and the like. But, it almost all goes out the window if you don't have a plan to pass the wealth that you've accumulated along to someone, be it your wife, children or significant other," she says.

Even when people take the time to set up an estate, a common mistake they make is to name the wrong beneficiary on their life insurance policy. "The situation happens most often with single parents," Murray explains. "If you name your underage child as your beneficiary, you're going to run into problems." The biggest problem is settling the estate.

"No insurance company is going to hand over payment from a policy to a minor," he explains. "The best thing you can do to avoid confusion and possible loss of benefits is to pick a family member or friend that you trust to act as a guardian for your child."

Setting up the right plan means nothing if you don't share the information with the people who need to know - your spouse, children or lawyer.

"If nobody knows that you have a policy, your family may end up paying anywhere from $ 4,000 to $ 10,000 just to bury you. That doesn't even count taxes on your estate if you have one," Murray explains." If your beneficiary doesn't know that they are named in your policy, the premium payments will stop and the policy will languish in probate, without gaining in value. So, effectively you're losing money," he says.

Kirkland acknowledges that secrecy is not only a dumb mistake but an enemy of financial success, as well. "I see it all the time, particularly with women," she says.

"The husband, who had been handling the investments, dies and the wife is now suddenly in charge of her own financial well-being. For a person who never dealt with finances before, even the quarterly statement can be overwhelming," Kirkland says.

"I had one woman who opened an account without her husband's knowledge. She told her young son, but not her husband," Kirkland recalls. "When she passed away, the son, in his grief, forgot all about the account. It laid in probate and was eaten up by state taxes, lawyers' fees and other things that attack accounts where there is no control."

BUSINESS ISN'T

IMMUNE

Many of the same pitfalls that plague individuals, including the issue of succession, also hamper the black small businessman, says Willie Daniels, who in 1971 co-founded Daniels & Bell Inc., the first black member firm of the New York Stock Exchange.

"The whole idea behind being in business is that the business will survive without the presence of any one individual," says Daniels, who has headed his own firm, United Daniels Securities, since 1984.

"When you have a small business," he says, "the best thing you can do is set up a structure where, if the head guy ceases to be a part of the company, the firm will lose only 10% of its business, at the max."

The kitchen-table, all-in-the-family type of business typifying the small businessman also illustrates one of the entrepreneur's biggest mistakes, says Daniels.

"You may have a businessperson with enormous intuitive business sense and a great product, but when it comes to organizational structure, bookkeeping, accounting and all the other things that make a business run smoothly, there is a gap."

One of the reasons that so few ethnic firms are publicly traded is that the shortcuts and understandings between friends and family, so typical of these businesses, simply don't hold up under public scrutiny, Daniels believes.

"When you're getting ready to go public, the Securities and Exchange Commission isn't going to tell you what's right or wrong with your business plan or your accounting practices. But when it comes to analysts and independent auditors, the way you balance your books with your brother in the back room probably won't sit too well with them."

The self-made businessperson doesn't come from nowhere. "Usually you spend time in a company and gain expertise in a particular field before striking out on your own," Daniels says. "Maybe that was one of my own mistakes. I may have branched out on my own too soon." (See "25 Years of Blacks in Financing," Oct. 1994).

"I knew what I knew, but I didn't know it all, and it took me longer to learn" Daniels says. "When you work for someone else, you do your job and they feed you. When you work for yourself, you have to do the shopping, come home, prepare the food, add the ingredients, and cook it before you sit down to be fed," he chuckles.

All jokes aside, the bottom line - whether you're starting a business or trying to solidify your own accounts - is that a lot of financial errors can be avoided simply by taking the time to adequately research your stated goals and then sharing your plans and discoveries with others.

Remember, there isn't a situation known to man that someone else hasn't experienced. With that in mind, perhaps the biggest mistake you could make regarding your financial well-being is believing that your situation is unique.

THE MOST COMMON

MISTAKES

1. Failure to research stated goals. First you have an idea. Then you need to know how to make the fantasy real. To do that you have to find out who has tried it before, and did they succeed? If not, why not

2. Not using an automatic saving plan, like the 401(k), that features a matching employer contribution, is like leaving found money on the sidewalk.

3. Being too conservative with long-term investments. Although certificates of deposits, money market funds or other fixed-income instruments guarantee the principal, over the long term their low rates of interest will be eroded by inflation.

4. Succession. You can't take it with you. And unless you have a scheme to pass it on, you could leave others crushed under the weight of the bag full of debt you've left them holding.

5. Putting off the start date of your investing. He/she who hesitates is lost.

6. Not getting professional advice, since you can't possibly know it all.

7. Not setting aside at least three to six months worth of savings in an interest-bearing account.