Less than a month after California Gov. Gavin Newsom signed into law the Fair Pay to Play Act, the NCAA switched course and decided that it will allow student-athletes to receive compensation for their likeness, name and image, signaling a major departure from its previous stance. Amateurism has long been a core tenet of the NCAA’s identity and bylaws, but in recent years, it has been challenged by some who feel the NCAA is taking advantage of these young players as schools make millions off of athletes who do not see a penny of that money.
When it comes to the big question—should student-athletes be compensated?—the simple answer appears to be yes. But as the reality of what this compensation looks like becomes a focus, it turns out there’s an even bigger question—what will be done by young athletes with this newfound compensation?
A Game Without a Game Plan
California may have forced the NCAA’s hand, but now there’s the issue of figuring out what this means for athletes and schools, and the unintended consequences that may result. The NCAA made this announcement without defining what, specifically, this compensation would mean in practice. Nearly all of the details have yet to be worked out, with the NCAA leaving each division to come up with updates to their own rules by January 2021.
There are a lot of nuances to consider. Professional athletes already have specific financial needs that arise from things like longer retirements and uncertain career lengths. One of the greatest challenges in this industry is that these athletes are young and busy and don’t have as much financial expertise as others who’ve been able to learn over time. And now, this gets even more complicated as the “professional” athletes get younger and need help figuring out how to manage their finances from an earlier stage.
Common Financial Fumbles
Once additional money—beyond scholarships, room and board, meals, rent stipend, etc.—is added into the mix, new complexities will surface and new opportunities to take advantage of inexperienced investors will be created. In our years of advising professional athletes, we have seen a tremendous amount of questionable and unscrupulous investment practice, and we expect an even greater potential for young athletes to be victimized than their professional counterparts.
The gaps in maturity, experience and time available for athletes at the collegiate versus professional levels form a recipe for opportunistic investment professionals to pounce. Without a substantial amount of additional support from colleges and universities, the pay-for-play model will drastically increase a target pool that used to exist only in professional athletics.
In considering this problem, our experience has shown us two common mistakes among professional athletes that overshadow all others and can help guide advisors in best assisting the younger generation if they begin to accumulate residual income during their amateur years.
First, athletes (and young people in general) don’t always have a clear understanding of their relationship with their financial advisor. And this failing often falls more on the shoulders of the advisor than the athlete. The bar shouldn’t be “don’t get your money stolen.” While many will be merely looking for someone who won’t take advantage of them, advisors who can best convey the depth of their experience, particularly when it comes to their ability to manage large sums of money, will be at an advantage. It’s also crucial to ensure the client understands how the advisor makes money. Advisor compensation models are myriad and often complex, but with the industry moving toward transparency and many among the younger generation already harboring a healthy wariness toward financial professionals, the trust gained from properly disclosing—and ensuring the client actually comprehends—how, when and why you get paid is an important first step in what will hopefully be a very long relationship.
The second major mistake is a lack of due diligence when it comes to private investments. Given their social status and entrepreneurial spirit, professional athletes are frequently presented with lots of private investment opportunities, from family members, teammates, etc. However, in evaluating these kinds of opportunities, athletes aren’t always properly experienced or equipped to determine which deals will end up paying off down the road. The fact of the matter is, they often simply don’t have the time, bandwidth or understanding to take this responsibility on themselves. An advisor must be ready, willing and able to pick up this slack. Just because a client can’t do the due diligence himself, doesn’t mean he should miss out on a potentially great opportunity (or, conversely, get taken for a ride).
Find Your Team
These athletes spend much of their lives working with coaches and teams that will hopefully guide their careers. This same approach should also be applied to their finances. Advisors need not be threatened by the prospect of sharing the client with other professionals. Indeed, embracing the team-building process from the word go will allow you to establish your position as the trusted advisor in addition to reaping the benefits of spreading the advisory load and leveraging team members’ expertise in a wider variety of arenas.
A major part of properly managing young athletes’ finances is making sure they are patient and that their money is put away for the future. The educational element of this is crucial. And while advisors are a key piece of this, we feel that the NCAA itself has a moral obligation to educate this even younger and less financially savvy group of individuals on the importance and impact of investing and saving over time. This ruling by the NCAA must be linked to the financial education of the players, meaning that since the NCAA will now allow these student-athletes to be paid large sums of money, part of this development needs to include educational content, teaching players about the perils of excess spending and poor investment decisions. Of course, advisors will need to continue this kind of financial coaching with their new clients as well, but it’s important for the NCAA to lay the groundwork. The practical element involves removing the temptation to spend their money quickly and protecting them from any predatory actors who may try to take advantage of them and the system that created this young and inexperienced revenue stream. Advisors who can marry these two elements will have a valuable leg up when working with this potentially large new client base.
Leo Kelly is founder and CEO and Noel LaMontagne is a director, both at Verdence Capital Advisors.