In survey after survey about financial attitudes, parents are increasingly ranking money management and financial literacy as a key lesson to impart to their children. This has become even more of a priority in the wake of the economic crisis, which has devastated households. More parents are including their children in family discussions about finances.
The peril of not having an appreciation for money or responsible fiscal management is seen on a grand scale when we read about athletes who have inconceivably (to us) lost multi-million dollar fortunes. A 2009 Sports Illustrated special report found that 78 percent of former NFL players have gone bankrupt or are under financial stress by they time they have been retired for two years; that within five years of retirement, an estimated 60 percent of former NBA players are broke; and numerous retired major MLB players have similarly dropped the ball in maintaining their wealth.
The current economic crisis has further compounded a bad situation brought on by spendthrift habits.
Athletes are similar to lottery winners, except that it is their skill, and not luck, that has earned them astronomical (to us) paydays. Many are young and have never been exposed to such vast sums. “They see (their salaries) as infinite, like it doesn’t end, like they can’t spend it all,” accountant Scott Bercu told NPR recently.
But many do, like former point guard Kenny Anderson, who declared bankruptcy after earning more than $60 million during his 14 years in the NBA. Scottie Pippen and boxers Evander Holyfield, and Mike Tyson are just three high-profile cases of superstars who lost hundreds of millions.
How do athletes who suddenly come into wealth learn about money? It is a sensitive issue and several league and team representatives, as well as agents contacted by MillionaireCorner.com did not return phone calls.
Generally speaking, professional teams do leave educating athletes about money to the leagues or to agents or advisors. The leagues address money matters particularly to new players during so-called “rookie boot camps.” For example, the NHL and its Players’ Association conducts a Pre-Draft Orientation on the morning of the NHL Draft that features education and training on how to best manage and adjust to life as a professional athlete. “They also receive information on the respective businesses of both the League and the Players’ Association, and the roles each organization will play throughout their careers,” Players’ Association rep Jonathan Weatherdon said in an email. “Included in the orientation is a session on financial planning.’
For agents and advisors, job one in working with young and wealthy individuals is “to make sure they understand totally what they are investing in and what fees they are paying for those services, said Benjamin Pogofsky, Vice President Wealth Management with Morgan Stanley Smith Barney. “A 22 year old athlete is no different then a 22 year old attorney. They are both running a business and have the goal of growing their assets and planning for retirement amongst other things. We sit down and set goals and begin planning for them. I include their spouse and trusted advisors as much as I can and make every decision a group one to keep all parties as involved and interested as possible. The key to working with young successful individuals is a trusted, hard working relationship.”
Pogofsky fielded other questions about working with athletes on their finances;
MillionaireCorner: What are common questions athletes have for you?
Benjamin Pogofsky: “They often ask about retirement. A lot of times they even come to me with questions that may not be related to investments held with me at Morgan Stanley Smith Barney. (They ask) ‘Can I buy a house, this car, etc.’ I never want to tell a client they can or can’t do anything. I just make sure they are fully aware of the consequences. It’s surprising and bothersome at times but most athletes or young successful individuals typically do not ask about tax consequences and or fees so I always insist on reviewing both of these.
MC: What are the pitfalls and challenges athletes face as they come into “the big money."
BP: A young wealthy individual has to be very careful who they trust and with whom they surround themselves. It’s unfortunate but a lot of people see a young kid making money and all they see or think of is dollar signs. That, and the athlete sees a million dollars a month coming in but cannot predict how long it will actually last. It’s very difficult to plan and save for a retirement at 30 years-old while maintaining their current lifestyle. Almost all younger successful individuals trust too many people. They are new to the finance world and it’s unfortunate but a lot of times they have to learn the hard way that you can’t just trust somebody because they are a friend or a referral.
MC: What are some common mistakes athletes make with their newfound wealth?
BP: The most common mistake I see is not asking enough questions, such as how much are they paying in fees or how their assets are allocated. I have a new client who has been playing in MLB for over 10 years. We have been very close friends for most of that career. When I used to ask him how he was allocated and what types of returns he was achieving he would always say 10 percent. He never knew if that was pre tax or after tax and he never knew the fees that were associated with the account.
In addition, he had done little to no estate planning. As soon as we started the relationship, I stressed the importance of meeting with an attorney to discuss how to title the assets. Athletes are sometimes very private about their investments, but if an athlete has accounts at several financial firms it would aid them to share the allocations with all advisors. It’s similar to when you go to see a doctor and have to fill out the form stating past medical history and other procedures you may have had done.
MC: Are athletes today more sophisticated and knowledgeable about money than in the past?
BP: It’s hard to say. The problem with today's athletes is that instead of making $1 million to $3 million, they are now making $10 million to $20 million and thus are hiring more and more advisors and paying higher fees. In addition, they are letting their agents make more and more decisions and getting less and less involved (themselves). When you have millions coming in at such a rapid pace it’s a lot more difficult to review the activity in an account, such as expenses, checks and interest and performance. I try and sit down with my clients and review all account activity as regularly as possible.
MC: Are they more focused on the present or do some have an eye toward the future and retirement?
BP: All of my clients have an eye on retirement, regardless of their age. That may just be the way I work but that should be every client’s first goal. I explain the consequences of buying a new car or a new house and remind them of the legacy they want to build for there family. A young successful individual coming into this amount of money at such a young age needs a trusted advisor working in a collaborated effort to plan for their current and future lifestyle.