Boxer Evander Holyfield burned through $200 million; 34-year-old former $100 million earner Antoine Walker went bankrupt and is reduced to working a $30,000-a-year job. Advisors who can keep sports stars frugal and make sound investments can build giant reputations and billion-dollar practices.
Spring training’s over and every baseball fan in the industry is watching a new crop of rookies strut their stuff, not to mention dreaming of adding a few of these $2 million-and-up kids to his clientele.
Multiply that $2 million dream by basketball and football — and throw in hockey, tennis, golf and boxing — and there’s billions of dollars on the table for sports-loving advisors to fight over.
So why do about 60% of these highly paid athletes end up in bad shape once their careers end?
Debunking the myth of the spendthrift athlete
That’s a very different spin from the conventional wisdom that athletes blow their money on extravagant lifestyle choices, huge entourages and old-fashioned hubris.
But while even their own advisors are quick to blame them when something goes wrong, the fact is these clients have unique planning needs.
For one thing, a typical pro athlete usually only has about four or five years to bank on, and after that point the big checks usually stop.
Sure, those few years are incredibly lucrative, but it takes luck and sheer genius to parlay that initial contract into a career that can keep paying out for an entire decade, much less longer than that.
For every Derek Jeter who can keep slugging for 17 seasons and earn the $51 million three-year deals, there are dozens, maybe hundreds of players who leave the pro circuit at age 25 or 26.
But by that point, they’ve gotten used to the good life: the sports cars, penthouse apartments and everything that goes with them. And for all practical purposes, they’re effectively retired.
That means their retirement savings have to stretch to give them that lifestyle for not just 20 to 30 years, but, in theory, another 7 decades or even longer. And they’re starting with practically zero net worth, so they need to sock that money away extremely fast.
25-year-olds earning more than most 60-year-olds will ever see
The real problem is a broader lack of financial education for today’s 20-year-olds, no matter how they earn a living.
Throw in multi-million-dollar paychecks and a grueling road schedule, and advisors who cultivate athletes as accounts often find themselves spending a lot of time on what would be remedial work for just about any other ultra-high-net-worth client.
While the leagues have recognized the problem and are throwing a little money to FINRA to run personal finance seminars for new players, a lot of that basic advice goes out the window when these guys start cashing their checks.
And that’s the crucial thing. A lot of star-hungry advisors spend a lot of time prospecting for this year’s top draft picks — there are even referral services that claim to deliver qualified leads for $2,500 a year — but it’s probably a waste of time chasing rookies.
The first three-year contract is basically a lost cause, since these athletes and their families are still more interested in figuring out their new lives than they are in accumulating real wealth.
An advisor can bend over backward to sign one of these hotshots, but there’s no AUM there yet to earn a fee — and unless you can stand your ground and motivate your new star client into saving a huge percentage of his paychecks, that AUM isn’t going to materialize for a few years.
Meanwhile, you’ll be spending a lot of time helping your client’s family pay the bills and manage their 401(k) contributions.
For a lot of advisors, that can be rewarding enough, but for everyone else, it may be best to keep the box scores and profit/loss calculations separate.
Scott Martin, contributing editor, The Trust Advisor Blog. Jerry Cooper and Steve Maimes contributed to the editing and research.
Permalink: http://thetrustadvisor.com/practice-management/sports
