Tim Duncan recently joined a notorious club in professional sports: Athletes who have run into financial trouble as a result of irresponsible spending, faulty investments or misguided advising.
The 18-season NBA veteran and San Antonio Spurs center filed a lawsuit against his longtime financial advisor in January. Unfortunately, Duncan isn’t alone: The $1 million lawsuit resurfaces a longtime conversation surrounding professional athletes and mismanaged finances.
Sports Illustrated famously reported that within five years of retiring, 60 percent of NBA players are bankrupt. That figure increases to 78 percent within the first two years for former NFL players. (The growing trend was even covered by ESPN in its “30 for 30” film series—a documentary appropriately titled “Broke.”)
These statistics could seem shocking, when players’ average annual salaries range from $1 million to $5 million. However, wealth managers of high net worth clients are likely accustomed to these stories, particularly in cases of sudden wealth.
The Dangers of Sudden Wealth
Unlike gradually amassed wealth, sudden wealth recipients often find themselves with assets that surpass their resources and knowhow to manage them. As a result, professional athletes and
other sudden wealth recipients face unique challenges in wealth management:
- Lack of financial literacy: Many professional athletes are plucked from high school or college. This gives recruits little real-world experience to learn basic principles in budgeting, investing and financial literacy. Once drafted, demanding schedules leave little time or energy to devote to playing catch-up.
- Misguided advising: Many athletes fail to properly vet those that advise them on substantial personal and professional decisions. Placing their finances in the hands of friends, family or unqualified advisors can leave players vulnerable to devastating loss.
- Small (and uncertain) earning window: Mint estimates that an NBA player’s average annual salary of $5.5 million, across an average career span of 4.8 years, results in an average “lifetime” earnings of $26.4 million.
However, players’ spending habits often outpace salary when earned in a “lump sum” of just a few years. The threat of a career-ending injury, and the possibility of celebrity endorsements add uncertainties to a player’s lifetime earning potential.
- Irresponsible spending: Top-of-the-line cars and multiple residences are as common in sports as sky-high dining and entertainment expenses. But keeping pace with fellow athletes can quickly add up.
- Perceived tolerance for loss: Wealth, particularly quickly earned wealth, can create an illusion of impenetrability by insulating clients with more comfort and status than they are accustomed to. Fame can also create an unrealistic perception of one’s financial assets and one’s earning potential.
By familiarizing yourself with these challenges, wealth managers and advisors can help high net worth clients navigate unfamiliar territory.
Protecting Professional Athletes On and Off the Court
Consider the following when working with professional athletes:
- Emphasize the importance of budgeting. Too few athletes make long-term financial stability a priority. Position today’s earnings in terms of tomorrow’s standard of living, to encourage clients to make smart spending decisions.
- Vet all investment opportunities. Professional athletes are often approached by friends or family with investment opportunities, or befriended by entrepreneurial strangers. Leverage your position as an objective third party to conduct due diligence on behalf of your clients, and help them say no to bad deals.
- Properly insure investments. For high net worth clients, wealth management and risk management are tightly intertwined. Product recalls, class action lawsuits and claims often find their way back to those with the deepest pockets and the best-known names. Loss control, safety engineering and risk transfer (through legal contracts or insurance policies) can go a long way in mitigating risk and protecting wealth.
If Duncan’s story teaches us nothing else, it’s the importance of having a trusted advisory team. Take the proper precautions on behalf of your clients, and you can ensure their success long after they hang up their jerseys.
Parker Beauchamp serves as CEO and President of INGUARD. His personal portfolio focuses on clientele who require complex insurance and risk management strategies.