When it comes to professional athletes' salaries, the sky seems to be the limit. In 1991, the NBA Player's Association reported that its average player salary was $1 million. By 2009, that number had soared to $5.3 million. And, those with exceptional talent can earn considerably more — not to mention many added millions in endorsement deals.
Yet tales of athletes' financial woes are hardly rare.
Last year, New Orleans Saints all-time leading rusher Deuce McAllister filed for bankruptcy protection for the Jackson, Miss., car dealership he owns. Broke former NFL running back Travis Henry was jailed for non-payment of child support. In July, former New York Mets and Philadelphia Phillies outfielder Lenny Dykstra filed for Chapter 11 protection in California, claiming he had $50,000 in assets — and between $10 million and $50 million in liabilities.
These are just some of the stories. Financial and pro athlete industry insiders alike say that athletes from the nation's three largest, most profitable leagues — the NBA, NFL and MLB — are suffering from what could easily be called a financial pandemic.
The numbers seem to support this. While salaries in all three leagues have risen steadily over the last 30 years, a February 2009 Sports Illustrated article reported that:
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By the time they've been retired for two years, 78 percent of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.
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Within five years of retirement, an estimated 60 percent of former NBA players are broke.
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Numerous retired MLB players have been similarly ruined, and the current economic crisis is taking a toll on some active players as well.
Opportunity Knocks
“Pro athletes have a different set of economic challenges from other clients,” says Chong Nam, a 12-year veteran rep and partner in Nam Cortez Wealth Management at Wells Fargo Advisors' Las Vegas branch. Nam specializes in financial planning for professional baseball players, and currently lists 25 of them among his top 100 household accounts.
“There's a far shorter peak earnings period than in any other profession,” says the multi-million-dollar producer, noting that the average MLB rookie can expect to play 5.6 years, according to a recent study by the University of Colorado. “They may have seven or eight years, if they're very lucky.”
They also often lack the time and desire to understand and monitor their investments, he adds. And, while the average person has decades to recover from an investment mistake he makes at age 30, pro-athletes are often at or near retirement by then.
Another problem: Pro athletes are young guys thrust into a “new money” culture, says Nam, 39. “Baseball players typically spend three years in the minor leagues making around $800 a month, and another three making league minimum. There may be three more years of possible salary arbitration until they hit free agency and start making big money.” By then, he says, they feel they've paid their dues and want to start enjoying it.
“Yet, they rarely know how to budget,” he says. “If a player makes $10 million, for example, he may be left with maybe $6.5 million after taxes. Now, he wants to buy a $3 million house, a Maserati, spend thousands each week on entertainment, etc. But, his major earning years are numbered. And this money must last the rest of his life.”
And, in recent months, the swift fall from grace of golf phenom Tiger Woods shows that even the most lucrative endorsement deals can be cut short.
While each of his clients has a customized financial plan, professional athletes generally need a heavy focus on fixed income, Nam says. “They don't need the ‘pie in the sky’ returns that come with major risk-taking. They already have tremendous assets. They need to focus on safety and security.”
Nam began his brokerage career in 1997 by partnering with Eric Cortez at the Las Vegas branch of what was then Smith Barney. Prior to joining the industry, the now 41-year-old Cortez was an aspiring actor with a number of small television and commercial roles to his credit. “Since he knew his share of Hollywood agents, we decided to try and grow our business by asking them to introduce us to the business managers of professional entertainers,” Nam explains. He considers Cortez, a Chartered Market Technician who is going through the CIMA program, the consummate “numbers man,” and sees himself more as the “marketing force” behind the operation. Slowly and steadily, the team built a name for itself in the entertainment industry.
In 2007, they had another idea. “While we were on a flight leaving Super Bowl XLI in Miami,” Nam recalls “we read an article describing the financial downfall of many pro athletes. After further researching this, we realized that we could apply many elements of our entertainment business model — the two most important being confidentiality and transparency — to help pro athletes.”
Playing the Player
Another huge problem pro athletes face is mismanagement of their money by unscrupulous advisors, unqualified friends and relatives, and the hordes of other folks who barrage them with investment ideas, Nam says. The NFL Players Association reports that at least 78 of its players lost a total of more than $42 million between 1999 and 2002 because they trusted money to financial advisers with questionable backgrounds.
There do not appear to be many safeguards in place to protect pro-athletes. The MLB, NFL and NBA all offer some basic financial education instruction. But, as for having systems in place to vet out unscrupulous advisors, Nam says, “I only wish they did.”
Greg Bouris, director of communications for the MLB Players Association, said the group does not work with financial advisors and leaves money management decisions up to the players. “We run career development seminars for certain rookies each year and include some basic financial education. We warn them that people will be coming out of the woodwork to try and mange their money, and stress the importance of having a ‘checks and balances’ system by having several professionals- like agents, accountants and attorneys — help manage their money. But, who they choose is up to them.”
Tony Christensen, president of Louisville, KY-based Access Wealth Management, a five-year-old independent firm affiliated with Wells Fargo Advisors Financial Network, has spent more than a decade working with high-net-worth clients, most of whom are entertainers, NASCAR driverss and athletes in the NFL, NBA and NCAA. He feels the pro sports leagues “have gotten better at educating these kids on finances over the last 10 years. They put on rookie camps and have started to teach them about the pitfalls out there.” But, pro athletes are still very much preyed upon by unscrupulous and/or unqualified financial advisors, he says. “Everyone wants a piece of them, because they're dealing with monstrous sums of money.”
Dana Hammond, president of the NFL Players Association's (NFLPA) Financial Program, says that, in 2000, the group partnered with Financial Finesse (a Calif.-based provider of ‘unbiased’ financial education and counseling services for corporation and organizations members) giving players access to an on-line education program maintained by CFPs. “We also have 400 advisors in our Financial Advisors Registration Program who can help manage their finances.” Criteria for the program are very basic: a college degree, five years of licensed experience, and no history of fraudulent activity. And, the group's website clearly states that it “is not endorsing any Registered Player Financial Advisor, and is not responsible for, and disclaims, any liability for the acts or omissions of any Registered Player Financial Advisor.”
Like Nam, Christensen says he gets new business exclusively from referrals. “Most of the pro athletes I meet already have someone managing their money. The main problem is that it's the wrong person. You may have been an advisor for 30 years, but if none of your clients have been pro athletes, you've got virtually no experience that can help them, because their needs are too specific. My first pro athlete client had taken a big financial hit because he was stuck in some illiquid real estate investments that were very hard to track, and totally wrong for his needs.”
Advisors to the pros must be fully versed in all of the retirement and other benefit plans of a player's specific league, he says. Christensen manages these clients like institutions because “they're very much like institutions: they have a lot of money and an absolute return focus. We want to be sure they're not solely dependent on the stock and bond markets appreciating to meet their goals.”
He builds clients' portfolios much like institutions do, including allocations to alternative investments like managed futures, hedged equity, long/short funds, private equity, and commodities. “We use institutional caliber managers and also have an absolute return focus,” he says.
The bottom line, he says, is risk control and budgeting: “A lot of the athletes who come to us don't know how much risk they had in their portfolios; how aggressive they were being. We make sure their investments are fully registered, mostly liquid, and priced on a daily basis.
“They need rainy-day money; we suggest they have enough to live on for two years — and those funds need to be liquid and not subject to market risk,” he continues. “They also need long-term growth funds that are also liquid. Private equity is a very important diversifier. But, it's also potentially very dangerous, which is why we use only top managers. We've been able to create risk control plans that deliver bond-type volatility with equity-type returns.”
Christensen also asks his pro athlete clients for “spending requests. We're not looking to tell them whether or not they can buy something. We just want the chance to show them — before they make a purchase — how it will affect them down the road, and then have them make an educated decision.” An NFL client recently asked him about buying a $3 million vacation home. “He had more than enough to buy it, but wanted to see how it would affect his future,” Christensen. “I laid the numbers out for him, and he decided against it. I literally have athletes calling me from car dealerships to get this kind of information.”
Nevertheless, like Nam, he says his clients can and do enjoy a high standard of living now. “We're not building wealth for them — they already have it. We just want to give them the tools to maintain it.”