Protecting the Wealth of Professional Athletes
For a small country, New Zealand produces many elite athletes who reach the centre of the world stage in their respective sports, which can deliver the opportunity for staggering career earnings.
If managed well, these earnings will provide life changing financial security, however without the appropriate education and processes, the money will be gone as quickly as it was earned.
"Many professional athletes, focused on being the best in their respective sport, are unprepared for the challenges and financial responsibility required to manage the accumulation of rapid and significant wealth".
As the opportunity arises for these elite athletes to earn significant money while they are at the ‘top of their game’, the prospect of losing this fortune is very real too if international statistics are anything to go by.
A recent study showed that in the US, 78% of NFL players, who have an average salary of $2 million a year during their careers, go broke within the first three years after they stop playing. The statistics are not much better for the former NBA players with 60% of the former league players facing financial ruin or bankruptcy within 5 years of coming off contract.
The financial carnage is not limited to American football and basketball players, with just about all sporting codes able to cite examples of sports people becoming a victim of poor financial management and in many cases, extravagance being the cause of their financial woes.
Mike Tyson and Evander Hollyfield, as arch rivals in the boxing ring, have similar post career stories, in that both of them squandered their fortunes and are now financially ruined.
Mike Tyson’s career income exceeded $400 million. By the age of 40 he was $38 million in debt as a result of extravagant spending, like the purchase of $2 million bathtub and three bangal tigers for $250,000 each, which cost him $500,000 to feed each year.
Evander Holyfield, better known for ‘biting Mike Tysons ear’, found that gambling, three expensive divorces and maintenance payments for some of his 11 children took the ‘largest bite’ from his £150 million career earnings, leaving him with little to show for his efforts.
Poor tax compliance has seen other household names like Boris Becker and Diego Maradona face financial ruin.
Becker, a former World number one who won three Wimbledon Championships, with career earnings in excess of £25 million, was pursued for failing to pay taxes and was subsequently forced into bankruptcy.
Diego Maradona, the Argentinian football superstar played a pivotal role in leading his country to the 1986 Football World Cup win and once the global face of Puma and Coca Cola, and with career earnings in excess of $25 million, faced financial ruin at the hands
of the Italian Government when tax agents chased him
for €37 million of unpaid taxes.
Ordinarily, wealth from business is accumulated gradually, providing the opportunity to learn about prudent financial management as wealth grows. Most athletes are “more like lottery winners”, with a monetary event early in their careers, before they are well prepared with a trusted advisor or had the opportunity to learn the necessary financial management skills themselves.
Who to Trust
One of the greatest challenges that professional athletes face in their private lives is figuring out who they can trust.
In 2008, a survey managed by advisory firm, Rothstein Kass, surveyed 178 professional athletes finding that over 70 per cent of athletes surveyed believe that they have been exploited by advisors.
Many athletes will not have the opportunity, or desire, to establish an ongoing career in their sport which has made them ‘a star’, requiring them to plan for their second career for when their professional career finishes.
Many athletes do not however do this planning and when they finally finish competing, reality sets in as they miss the structure that training and competing in their sport gave them. The first few years are unproductive, which can result in poor investment decisions as they are forced into more risky opportunities to make ‘a quick buck’.
A professional athlete’s career may be cut short at any time by injury, reducing, or even terminating their ability to earn from playing or endorsements.
Athletes usually have a plan to play for a certain period of time, and when this time is unexpectedly reduced, their ability to save will also be affected.
It is wise for athletes to save their early earnings, as injury can prevent an athlete from replacing these earnings later in their career if they are forced out with injury.
Many athletes invest into high-risk private investments, partnerships with colleagues in industries which they know little about or investments in start-ups with a self-belief that their ‘high profile’ brands will ensure success in their businesses when others in the same sector have struggled.
There is a saying that ‘lightening does not strike twice in the same place”. It is useful for professional athletes to consider this when making investment decisions, as they may not be assured the same success with their investments as they have exhibited in their sporting career.
The probability of infidelity triples with a ‘high profile sports relationship’ and the financial cost of breakdown in relationships is very real.
The impact on the athlete may not be just measured in money terms as financial assets are divided with ex partners, but the associated stresses of relationship breakdown can negatively affect the way that the athlete performs, compounding the effect on their future earnings.
Scandalous affairs can also result in sponsors withdrawing lucrative contracts with athletes.
Supporting the Village
Some athletes see their financial success as ‘luck’ and feel an obligation to provide financial support to friends, extended family, and in some cases, other competitors in their sport who were not quite so fortunate in securing the lucrative contracts.
A desire to help others is admirable, however this desire must be balanced with the need to ensure that they are financially secure and have a prudent financial plan while playing and a post-sport plan from which to earn a living.
Career planning, sensible spending, prudent investing and considered structuring of personal finances will help athletes to protect the value of their career earnings.
DOWNLOAD a PDF of this Article
READ other articles in the Families & Business Series, by Ocean Partners