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Don’t get your ass(ets) kicked: Investing 101 for pro athletes

Pro athletes are notoriously bad investors.  Once bright starts worth millions of dollars are frequently left destitute within just a few years of retirement.  Put simply, these pros completely blow it when it comes to investment management.  But it doesn’t have to be that way.

The Evidence

Sports Illustrated, How (and Why) Athletes Go Broke:

  • 78% of former NFL players have gone bankrupt or are under financial vickstress because of joblessness or divorce.
  • Within 5 years of retirement, an estimated 60% of former NBA players are broke.
  • The NFL Players Association says at least 78 players lost a total of more than $42 million between 1999 and 2002 because they trusted money to financial advisers with questionable backgrounds.

Business Insider, 10 Ways Sports Stars Destroy their Finances:

The top five reasons pro athletes squander their fortunes:

  1. Ponzi schemes
  2. Bad investments
  3. Divorce settlements
  4. Running a business
  5. Do drugs
  6. Have too many children
  7. Using the wrong advisors
  8. Too much real estate
  9. Dog fighting
  10. Acting dumb

Quite simply, many professional athletes are new to money — a lot of money — and don’t know how to manage it responsibly.  But many of these reasons they blow their money show that they live their entire lives irresponsibly.  From fathering multiple illegitimate kids to  dogfighting, athletes are young, testosterone-pumped, newly-monied and on top of their games on the field but typically spiraling out of control off.

Current solutions

Professional sports leagues and players associations are trying to help.  Here’s one example.

Financial Advisors Program: The NFL’s Player Association launched the FAP in 2002.  The players’ union created the program to protect players from unscrupulous people attempting to take advantage.  The program screens financial advisors to make sure they’re clean from a regulatory standpoint (no nicks on the U4), have some experience, carry adequate insurance, and have proper licensing.

Why they don’t work

If the problem stems from a behavioral standpoint, an effective solution would need to target the behaviors to work effectively.

Screening fail: Obviously, this is ineffective in stopping wanton financial fraud.  So what if an advisor hasn’t been caught for bad behavior or a breach in fiduciary responsibility.  It doesn’t mean he doesn’t participate in such behavior.

Advisors and firms also to blame: I understand that a 20-something star doesn’t want to hear about curbing spending and acting fiscally responsible.  Yet, the firms representing these athletes are the same ones pitching illiquid investments in startups, restaurants, and real estate.  Are these firms pitching these same investments to their graduate-degreed, white, CEO clients?  Don’t think so.

Societal mores: I hate to get philosophical about these things, but what does it say about our society that creates superstar pro athletes who literally piss away tens and hundreds of millions of dollars in a matter of a few years?  I’m not against huge remuneration in a system that rewards superstardom.  It just seems so wasteful knowing that these money would last longer if you smoked it.  Think of the hungry just a small percentage of the money could feed.

Suggestions for Improvement

Upgrade screening:  This U4 screening is a sham.  Instead, why not screen actual client portfolios to see what the adviser is suggesting?  What about fiduciary responsibility?  Just because the client may not be responsible doesn’t mean that adviser can also chuck it out the window.

Different forms of pay packages: Libertarians will hate this suggestion but like the lottery gives winners different forms of payment, team owners can do the same thing.  Something like you can take 100% of your salary for each year you play.  When you retire after an average of 3 years, finito. Or, like a fixed annuity, take a certain percentage of your salary now and receive the rest in a form of a revenue stream for years to come.

Financial education: Pro players are not entirely interested in learning the difference between mutual funds and ETFs.  But a minimal form of learning curve must exist.  Owners and coaches, agents and friends, must hammer home the basic concepts of investment management.  Get role models of players who have been through the system who behaved responsibly and made it through with their wealth intact.

Incentives to give to charity: This is just a salvage-what-ever-is-left idea if nothing else works.  If pro athletes and their advisors really are just hopeless, let’s create a system that somehow minimizes the waste.  Incentivize athletes to give portions of their income to charitable causes.  Lets not let everything go down the drain.

Get athletes back into the system: I don’t have the data but I have a gut feeling that those players who stick with their sport after their playing days are over fare better financially than those who don’t.  Get players involved, working with athletic organizations at the pro and college level.  Keep them connected to a system that (mostly) rewards good behavior.

I don’t think professional athletes are a hopeless cause but I do think that the FA industry is not active enough in helping to find a solution.  There is too much money at stake not to make this work better.