Publications

- October 1, 2019: Vol. 6, Number 9

5 Questions: Why rich pro athletes so often go broke

by

Think professional athletes with their fat contracts have it made? Think again. Not all are paid that lavishly, and even those who do earn millions per season face short careers and many demands on their incomes. What is a financial adviser to do? David Johan and Travis Higgins, managing partners at Altruist Advisors, have a clientele that includes several professional athletes. So what is their gameplan?

Professional athletes are notorious for blowing their fortunes and ending up broke after their careers end. Why is this the case? What are the main reasons athletes fritter away their immense earnings?

Three prominent factors contribute to ill-fated financial endings for athletes. First is education. Most 22-year-olds don’t have the experience or resources to make good decisions on big-ticket items like houses and cars, much less investments. Second is the double Ts — time and taxes. Consider that an athlete is employed by a professional sports league for an average of three years, earning $1.5 million during that period. Taxes will erode 60 percent off the top, with agent fees and other expenses leaving roughly $600,000 in his pocket. If the athlete lives modestly, he will have $400,000 left, best-case scenario. Most have not developed other skillsets outside of their athletic profession, so they settle for low paying jobs when they exit the league. Third is the “keeping up with the Joneses.” Young athletes socialize and spend like veterans with bigger contracts but cannot afford to.

What are some of the special considerations that need to be taken into account when dealing with the financial affairs of professional athletes?

Taxes, for starters. Our NFL clients pay more than 50 percent in taxes. They must file a return in every state they play in each year and can end up being taxed at the city, state and federal levels. Note that standard agent fees of 3 percent are paid off the gross contract amounts, even though the player sees less than half of the money after taxes.

Then there are shady deals. Due to the young age and lack of financial support systems around most players, they are approached for money by zealous relatives and unscrupulous business people pitching every sketchy deal you can imagine.

Most professional athletes have short careers during which they earn a lot of money. How does that fact change a financial adviser’s approach to a professional athlete’s investment portfolio?

Planning becomes extremely accelerated. We plan for residual income right away and protection for the future. A general modern portfolio theory approach — with an expectation of 8 percent to 12 percent returns during a 30-year investment cycle — is not applicable in the case of athletes with short earning cycles. We start planning as if the client is a 60-year-old nearly ready to enter the income stages of their retirement planning, and we implement our endowment-style model to produce income right away and protect the principal.

You represent professional athletes in several major sports. What can you tell us about the specific athletes you represent and the sports leagues that employ them?

Our athlete clients come to us the same way all our clients have over the past 20 years in the industry, through referrals or personal introductions. League-wise the NFL is the most difficult for planning due to short careers, non-guaranteed contracts and the unfavorable Collective Bargaining Agreement for players. NFL-sponsored retirement and benefit plans do not become vested until year three or five. If not drafted in the first three rounds, where significant bonuses are given, they are playing on a league minimum contract ($400,000 stepping up to $700,000) over four to five years. More than 50 percent of the active players in the NFL are undrafted free agents making the minimum. The system is designed such that vesting in player benefits and lucrative second contracts come well after the average career of 3.3 years is over. It’s bad business for the owners to pay a veteran a lucrative second contract when they can sign young players every year for a fraction of the cost.

Give us a couple of examples of athletes that did exceptionally well at investing their money and compounding their earnings.

We feel tremendously blessed all our athlete clients have found success on and off the field. One part of our financial planning is to start another income source for them — another career — while they are still playing, so that they don’t have to worry about what comes next. Those second careers have included becoming a financial adviser, a broadcasting business owner, a tow-truck business owner, an athletic director, TV series performer and actor, a real estate mogul who took advantage of an injury year in college to get his master’s degree and has started a real estate business while still playing professionally.

Forgot your username or password?

We use cookies and other tracking technologies to personalize your user experience on our site and perform site analytics. By clicking on “I accept”, you consent to our Privacy Policy.