A Guide to Successful Wealth Management for Professional Athletes
When it comes to wealth management for professional athletes, it can be challenging to navigate it on your own. Read this guide here to learn tips for success.
According to a famous 2009 story by Sports Illustrated, 78% of former NFL players have gone broke or are facing bankruptcy two years after retirement. NBA players do a little better, but 60% of them are broke within five years of retirement. (source – https://vault.si.com/vault/2009/03/23/how-and-why-athletes-go-broke)
Knowing how and why some athletes go broke is the first step to protecting their money
Professional athletes can make millions of dollars in their careers, but they can lose it just as fast. To be effective, wealth management for professional athletes must address the unique situation athletes face.
Wealth Management for Professional Athletes Starts With Education
Athletes are a lot like lottery winners when it comes to their money (except becoming a professional athlete obviously takes way more work). Many athletes became very rich almost overnight. As a result, professional athletes may not know much about handling money. Compare an athlete to a business executive. They are in the same pay bracket, but the executive spent years building his salary and learning in the professional world. An athlete might not have that same experience. For the athlete, getting that education is key.
Athletes need this education because they are frequently the targets of financial scams. Unscrupulous business people see athletes as easy marks. John Elway, for instance, lost $15 million when he and a business partner invested in a Ponzi scheme. Between 2004 and 2018, professional athletes claimed nearly $600 million dollars in losses from fraud. That number only includes cases with public court documents. The actual total is probably much higher.
That is why it’s so important for athletes to understand their own investments and to find a wealth management service with a proven track record. You need to know exactly where your money is going and why.
Properly Diversifying Your Portfolio. Many athletes allocate too much money to private equity and do not properly diversify their investments. Athletes show a preference for tangible investments like businesses or real estate, along with private goods like homes or cars.
Diversifying your portfolio reduces your risk by investing your money in multiple different places. If one investment fails, you do not lose too much money, and those tangible investments fail. Most restaurants and small businesses eventually go under, especially if they do not have a strong business plan and management. The mindset of an athlete sometimes supports risky investments. It takes incredible self-belief and an appetite for risk to become a professional athlete. You need to believe you can beat the odds when so many other people fail, which encourages risky investments as well.
A well-structured portfolio for an athlete should include small (maybe between 5% and 10%) investments in private equity and real estate. Athletes should invest the bulk of their money in public securities, like stocks or mutual funds, and devote the remainder to some alternatives like gold. Investing in stocks and bonds may seem boring at first, but losing all your money in a failed business is the wrong sort of excitement. Proper investment planning is critical for athlete wealth management. Generally, athletes should be more conservative in how they invest their money because of their career uncertainty.
Stretching Money From a Short Career
The peak earning years for a professional athlete are very short, unlike other people in the same income bracket. The average career in the NFL may be as low as 2.5 years. That varies by position and skill level, but most players will not be around for very long. The NBA and MLB do better but not by much. The average NBA player lasts 4.8 years and the average MLB player lasts 5.6 years. Not only are careers in professional sports short, but they also end abruptly. Players suffer injuries. Teams cut players without warning. Unless you’re a bulletproof superstar, there’s no telling when your career might end. With such short careers, avoiding risk is crucial for athlete wealth management. Almost no athlete will ever make as much money after retiring as they do while they are playing. So, they need to make that money last, possibly for decades.Stretching your money that long takes careful planning, proper budgeting, and risk management (which is why education and diversification are so important).
Shielding Yourself From Requests
When you start to make a lot of money, people come out of the woodwork with their hands out. It doesn’t matter if you are an athlete or not. Fifth cousins, former friends, old classmates, or neighbors: they will all start showing up with their hands out. You need to refuse these requests to protect your finances. At the same time, it’s hard to say no, especially when family members are the ones asking. That’s when wealth managers can help. A wealth management service can shield you from unwanted requests. In effect, a wealth manager can be the bad guy so you can avoid hurt feelings and distractions.
Making Room to Spend
The first job of a wealth management service is to protect your money. But that doesn’t mean it’s all spreadsheets and sensible index funds. A wealth manager can help you carve out space for a few luxuries by helping you minimize your expenses elsewhere. For instance, one of the best ways you can save money is through effective tax planning. Depending on where you live and how you file, you could slash your tax burden. In other words, a wealth manager can help you find a responsible way to buy (or better yet, lease) that dream car. Instead of splurging now and going broke later, you can sustain a comfortable lifestyle even after your career ends.
Build Your Financial Team
Any professional athlete needs help to succeed. Of course, it takes a team, but even if you play an individual sport, you rely on trainers, coaches, nutritionists, and a range of other experts.
Wealth management for professional athletes is no different. You want an experienced and professional wealth manager as part of your financial team. If you wouldn’t tape your own ankles, why would create your own long-term financial strategy?
For more advice on how to protect or grow your wealth, check out some of our other blog posts. And when you’re ready to get serious about your financial future, explore our wealth management services.
Tetrault Wealth Advisory Group is a Canadian award-winning Financial Planning and Wealth Management firm situated in Winnipeg, Manitoba.