While professional athletes are often admired for their unique talents and followed by legions of adoring fans, fame carries an array of burdens, as well. Pro athletes can suddenly have access to huge amounts of cash, with little to no real-world experience or financial literacy. Athletes are expected to excel at their craft while often burdened by friends and family members in need.
Agent-representatives, meanwhile, will flock to young prospects, even as the athletes and their families try to discern which agents are authentic and which will help provide them the biggest payday, signing bonus and lucrative endorsement deals.
Sadly, these athletes are ill-equipped to deal with such responsibility.
In fact, there are many examples where pro athletes are close to penniless when the lights go out on their short-lived careers. The reasons range from their purchases of expensive luxury vehicles and overpriced real estate, to their bad investments in businesses and mounting alimony and child-support payments due to their having had multiple partners. The list goes on and on. The names keep changing, but the problem persists.
In addition, some players recklessly take out high-interest loans to maintain their lifestyles in between contract payments. Once they stop getting paid, they are often unable to make the loan payments that are inevitably due.
Finally, pro athletes often have little knowledge about how to manage cash flows and anticipate taxes owed to the government. They look at their overall top-line salary figures without anticipating the costs that will ultimately reduce their incomes significantly.
Educating pro athletes about the pitfalls of fame and fast cash is the first step in helping them avoid devastating financial losses.
Educating pro athletes about these pitfalls of fame and fast cash is the first step in helping them avoid devastating financial losses. Helping them understand the necessity for good spending habits and following a budget in order to save and control spending is key to helping them preserve their wealth.
One important strategy here is to create a written financial plan with a financial advisor, and to encourage the athlete-client to put away as much money as possible from day one. The financial advisor should not be the only resource but should serve as an important objective guide. The advisor should provide custom-tailored advice and encourage diversification of investments while posessing a strong track record, academic credentials and a fiduciary duty to put the player’s needs first.
Some key planning considerations for pro athletes should include: 1. choice of domicile—certain states are preferred as they are void of income taxes; 2. mitigation of any “jock tax,” meaning local taxes on earnings associated with playing professional sports in multiple states; 3. signing bonuses and their impact on a player’s taxes, which are usually allocated to the state of domicile; and 4. the ability to allocate and itemize certain tax deductions such as agents’ fees, gym memberships, athletic training equipment and even nutritional supplements and rehabilitation massages.
In addition, athletes should understand how any financial advisor will be compensated, as well as any potential conflict of interest. Regular interactions with that financial advisor should take place, to help the athlete understand his or her financial plan in clear terms.
For a professional athlete, then, the unique situation of receiving a large percentage of one’s lifetime earnings in a relatively short time span presents challenges that should not be overlooked or ignored.
A trusted and qualified financial advisor can help navigate potential financial pitfalls and serve as an important resource in helping the athlete maintain and enjoy a lifetime of financial stability.
Michael S. Schwartz offers advisory services as a representative of Northwestern Mutual Wealth Management Company (WMC), a limited purpose federal savings bank, and a wholly owned subsidiary of The Northwestern Mutual Life Insurance Company, Milwaukee, WS.. (NM). Northwestern Mutual is the fleet name for NM, its subsidiaries and affiliates. Investments held with or managed by WMC are not insured by the FDIC, are not deposits or other obligations of, or guaranteed by, WMC or its affiliates and are subject to investment risks, including loss of the principal.
Michael S. Schwartz is an insurance agent of NM (life insurance, annuities and disability income insurance), and Northwestern Long Term Care Insurance Company, a subsidiary of NM, and a registered representative of Northwestern Mutual Investment Services, LLC (NMIS), an NM subsidiary, broker-dealer, investment advisor, member FINRA, SIPC.
Pioneer Financial is a marketing name used by a group of Northwestern Mutual representatives (not all of whom are affiliated with WMC) including Michael S. Schwartz (referred to as the “firm”), and is not a legal entity, partnership, investment advisor, broker-dealer or affiliate of NM. The information contained in this article is not a solicitation to purchase or sell investments or securities. The views expressed herein are those of the author and may not necessarily reflect the views of Northwestern Mutual. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame logo), which it awards to individuals who successfully complete
This article was originally published in the May–July 2017 issue of Worth.