Investor Protection Clinic - Student Blog

More Money, More Problems: Avoiding the Riches to Rags Hall of Fame

 

Rising television contract deals have resulted in salaries for professional athletes that are nearly seven-times larger than they were twenty years ago. According to the NBA Players’ Association, its average player salary has grown from just over $1 million in the early 1990s, to nearly $7 million in 2017.  Despite the NBA requiring entrants to the Draft to attend one year of college prior to declaring themselves eligible, the education they are receiving is tailored far more to increasing the players’ draft stock as opposed to their stock portfolio.

 

However, with that newfound rising stardom as a professional ballplayer, tales of athletes’ financial hardship often follow.  Although there is no reason to believe that athletes are any more or less financially literate than other Americans, they may be particularly vulnerable to investment fraud because they receive large amounts of income early in their lives.

 

We often hear about athletes and celebrities that fall on hard times after early successes. For example, stars like Deuce McCallister, New Orleans Saints all-time leading rusher, filed for bankruptcy protection stemming from a chain of unsuccessful car dealerships he owns in his native Jackson, Mississippi.  Former San Francisco 49er and recent NFL Hall of Fame inductee, Terrell Owens, also cites bad investments and misplaced trust in financial advisors for filing for bankruptcy after a career of amassing $80 million in player salary.  The issue spans across sports.  Former MLB All-Star Lenny Dykstra is another notorious example of financial ruin after reckless spending habits and an ill-fated carwash business resulted in the loss of nearly $60 million and a six-month prison sentence for bankruptcy fraud.  Lastly, Las Vegas local and internationally renown entertainer, Wayne Newton, also entered bankruptcy proceedings after first amassing a net worth of over $100 million. 

 

Entertainers and professional athletes face unique challenges.  They have a steeper learning curve than most other investors—namely a far shorter peak earnings period than your standard individual ascending the corporate ladder.  This makes it critical for them to prudently manage accumulating wealth during the five to eight years they are earning their largest paychecks.  Good decisions here can prepare them for a second career after the limelight dims.

 

Yet good help can be hard to find.  Lacking investing acumen themselves, many choose to rely on “trusted” confidants, family friends, or other types of “managers” to supervise their wealth.  If this trust is misplaced, recovering from financial mismanagement can be difficult, if not impossible. 

 

When it comes to professional athletes, the stats tell a grim tale.  One study found that one out of six NFL players will file bankruptcy within twelve years of leaving the league.  Another found that about one out of three will experience severe financial distress.  This happens even though the average NFL player earns about $3.2 million dollars during their time in the league.

 

While cases of financial ruin always involve differing sets of circumstances, one key element they often share is the complaint that the investor trusted the wrong people.  Indeed, few safeguards exist to protect young athletes from bad actors.  At a minimum, athletes and entertainers need to know how to check to make sure any financial adviser is actually licensed.  For More Information.

 

We need to do more to set athletes up for long-term success.  Professional sports leagues and ownership committees should do more to help players mitigate risks.  One option might be instituting mandatory investment clinics during rookie camps.  Teams could also partner with regulated and reputable wealth management groups to kick-start an education process to teach these young millionaires about managing money and financial risks.  For example, Morgan Stanley has launched its Global Sports & Entertainment Division to serve the many unique and sophisticated needs of today’s professional sports stars and entertainers.  Morgan Stanley has partnered with former athletes to raise awareness.  It now uses Antione Walker (former NBA star who made and lost $108 million during his career) and Bart Scott (former NFL star notorious for his lavish spending tendencies while in the League) to spread the message.

 

                                                             

 

More about Garrett Logan
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