Financial Sports ManagementToday’s financial advisors must cater to a diverse clientele. There are Millennials, wrestling with student loans, Gen X’ers saving for their own children’s tuition and Baby Boomers addressing both fixed income and longevity needs. Of course, there are plenty of niches in between. Maybe the most challenging clients of financial sports management are professional athletes.

This group is typically classified by brokers as ‘ultra-high net worth’ ($5 million+) clients with very specialized needs. These include asset protection, financial budgeting, insurance needs, tax consulting and risk management concerns.

The following commentary is not meant to be specific financial or legal advice. It is for educational purposes only since personal finance can be very client-specific.

Asset Protection

Unfortunately, professional athletes are frequent targets of litigation. A financial advisor needs to make sure the athlete has all adequate asset protection. For certain clients, an advisor may suggest protecting wealth with a Domestic Asset Protection Trusts, which are entities that may shield certain assets from creditors as well as spouses (in the case of a Nevada DAPT).1

A simple fact of life is the high rate of divorce, roughly 1 in 2 marriages.

The odds of getting divorced for a professional athlete are closer to 3 out of 4 and the costs can be huge when it includes the division of assets, alimony, child support, etc.2

Some divorces can be worth hundreds of millions of dollars in assets for the spouse. This was the case for NBA legend Michael Jordan and professional golfers Greg Norman and Tiger Woods.3

A financial advisor has to explore ways to protect their client, sometimes including the always awkward prenuptial agreement. Former NFL and MLB star Deion Sanders utilized such an agreement with his ex-wife resulted in a settlement of a roughly $10 million house going to the spouse, a much lower total than his total net worth.4

Conversely, there’s times when a hefty divorce settlement may be warranted (abuse, infidelity, etc.) In this case, the spouse may want to utilize the services of a forensic accountant to uncover assets being hidden.

Financial Budgeting

The financial goal for many professional athletes should be wealth preservation, not growth. One of the best ways to achieve this goal is simply keeping discretionary spending under control. For some athletes, especially younger ones, this is crucial.

Peer pressure is a major problem among rookies who are often coerced into living above their means. This might be picking up the tab for the whole team during a ‘night on the town’ or the need to show off the latest bling (expensive jewelry and accessories).

Sadly, a Sports Illustrated article reported that 60% of NBA players are bankrupt within five years of retiring.5 And considering the compensation these athletes are receiving, this is quite a feat.

Players unions are trying to combat this by mandating that 1% of an athlete’s earnings being placed in a retirement account by the league that can’t be touched. This is still being negotiated.

Insurance Needs

Unfortunately, athlete and celebrities are often the targets of frivolous lawsuits.

Many could benefit from an umbrella insurance policy, general coverage which typically protects up to one million but can be customized for different client’s needs. Some college athletes have taken out specialized insurance policies in case they get injured before they can sign a professional contract.

Another consideration is long-term care insurance. Professional athletes have careers that are substantially less than traditional employees. NFL players average the shortest careers at just 3 ½ years.

Sports Illustrated also revealed that 78% of NFL players are “broke or in financial distress within two years of retiring from the game”.6

Whether the career is short or ‘long’ (in professional sports, maybe a decade or slightly more) the physical punishment some athletes endure often results in greater financial obligations later in life. Frequently, this comes in the form of physical health care needs. Cognitive deficiencies are also becoming common, which could affect the player’s chances for post-retirement income as a broadcaster or in a similar capacity.

Hockey players might fare the worst since their careers are some of the longest and the punishment is brutal. Depending on the sport, long term insurance care may be essential.

Tax Consulting

Due to high salaries, effective tax rates can be north of 50% for many professional athletes, posing a tricky proposition for advisors. Municipal bonds might be a good option for these clients, especially if they play for a team in a high tax state such as New York, California or Illinois.

Further, many athletes end up working for ESPN as commentators or analysts. Despite being owned by Disney, ESPN is headquartered in Bristol, Connecticut, one of the highest tax rates in the nation.

Municipal bonds are federally tax exempt and often exempt for state and local taxes as well. For high-net worth individuals, they can offer higher tax-adjusted returns than other bonds.

Taxes for the high net worth individuals can also be very complex. And every road game you play in another state counts as income in that state, even if you reside in a state with no state tax.7 For example, say you play for the Orlando Magic and enjoy Florida’s no state income tax. If you go to play the New York Knicks for a road game, you will have to pay. It’s a good idea to have a CPA on staff for tax advice.

Risk Management

Professional athletes are often targets for scam artists so fraud is a common risk. Make sure your financial planner is legit (properly licensed) by using Finra’s broker check.

Athletes can benefit from an advisor with an advanced degree such as an online Master’s in Finance degree or a financial designation such as a CFP, CFA or CPA. These programs provide comprehensive financial curriculum and significant ethics training. You should also verify that they have obtained said designations.

Today, it’s easier than ever to verify membership. This due diligence can help avoid being a fraud victim.

Athlete Victims of Fraud

Recently, Charles Banks pled guilty in federal court to stealing millions from retired NBA star Tim Duncan. Bank’s fund, Terrior Capital, ‘invested’ in alternative investments such as wine and hospitality businesses including one of Bank’s own, Gameday. Mostly, the money reportedly went directly to Banks.8

In all, Duncan lost $13.5 million in the scheme.9 This goes to show that even athletes that attended the best schools (Duncan went to Wake Forest) are targets and must be careful.

Sometimes, brokers steer client funds into special ‘deals’, often their own side businesses. In the case of NFL quarterback Mark Sanchez, and MLB pitchers Jake Peavy and Roy Oswalt, this occurred with a financial advisor named Ash Narayan.10

The ‘deal’ was a sports ticket business, called the Ticket Reserve. Partially owned by Narayan himself, the company allowed fans to purchase face value tickets before they went on sale (even before the opponents had been determined). Sometimes the money was sent to the Ticket Reserve without the client’s knowledge.11 The business was described as a Ponzi-scheme by the SEC.

Further, Narayan had marketed himself as a CPA, which he was not.12 Verification of this could have potentially avoided the bad investment. These stories are one reason why some athletes might consider the larger brand names such as Wells Fargo and Morgan Stanley.

Athletes Becoming Financial Advisors

To help combat this epidemic, some athletes are preparing for post-playing careers as financial advisors themselves. Since they aren’t outsiders to professional athletes, they engender trust and often raise funds easily among their brethren. One example is former MLB pitcher Marc Wilkens, now a financial advisor with Wells Fargo.13

Then there’s Royce Clayton, a member of the Boston Red Sox 2007 World Championship team. His post-baseball career has found him in the financial industry hired by New York’s Four Wood Capital Management to help build a specialized division catering to professional athletes. Clayton’s role will reportedly be more in the client relationship area, not direct money management.14

And there are financial services companies that cater exclusively to professional athletes. Based in Scottsdale, Arizona, aptly named Athlete Wealth Management Group focuses solely on the needs of professional athlete’s customer.15 Remember, the same scrutiny should always be given to all potential money managers, even those run by former athletes.

 

1https://www.forbes.com/sites/ashleaebeling/2016/07/06/comparing-domestic-asset-protection-trust-states/#61c0517b59fd
2,15http://athletewealth.com/
3,4http://www.thesportster.com/entertainment/the-15-most-expensive-divorces-of-professional-athletes/
5,6,13,14http://www.reuters.com/article/us-athletes-advising-idUSBRE86G0V920120717
7https://www.usatoday.com/story/sports/2015/04/13/tax-day-april-15-accountant-pro-athletes/25742385/
8,9http://sports.yahoo.com/news/financial-adviser-pleads-guilty-defrauding-nba-star-duncan-175946385–nba.html
10,11,12https://www.onwallstreet.com/news/price-for-bilking-cowboys-qb-sanchez-and-other-star-athletes-sec-ban

 

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Financial Sports Management
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Financial Sports Management
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Today’s financial advisors must cater to a diverse clientele. Maybe the most challenging clients of financial sports management are professional athletes.
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