Managing The Wealth Of Sports Stars

Harriet Davies

21 March 2012

The sports industry in the US was worth some $422 billion in 2011 according to one estimate from Plunkett Research and creates some very wealthy individuals. With many athletes suffering from bad financial advice, there is an opportunity for the wealth management industry to raise its game.

To give a taste of some of the salaries athletes earn, the New York Yankees – which has the highest total payroll of the Major League Baseball teams – paid an average salary of 6.8 million in 2011, according to data from USA Today. In the NBA, the Los Angeles Lakers – with the highest overall payroll - paid an average of $6.9 million in 2010.

Of course, for many sports stars their pay from playing may be a small component of their overall packet, with lucrative sponsorship and advertising deals on the table. But as wealth managers know, this kind of pay packet combined with media attention brings as many challenges as it does opportunities.

Many of these challenges are the exact same as those faced by other HNW individuals, with one big exception, says Paul Tramontano, chief executive of Constellation Wealth Advisors, a family office that works with sports industry clients.

That exception is that compared with a patriarch or matriarch, who has built a successful business over a long time, athletes are “more like lottery winners”: they have the monetary event early in their careers, and before they are well prepared with a team of trusted advisors, says Tramontano.

And he says that while oftentimes athletes are surrounded by a good support network of family, friends and an agent, when it comes to finances “the great majority is guided by the wrong people.”

“One of the greatest challenges that professional athletes face in their private lives is figuring out who they can trust,” agrees Richard Flynn, head of the Family Offices Group at Rothstein Kass and co-author of Fame & Fortune: Maximizing Celebrity Wealth.

“In 2008, we conducted a survey of 178 professional athletes and found that over 70 per cent believe that they have been exploited by advisors,” says Flynn.

One lawyer, Larry Landsman of Block Landsman, who has experience representing NFL players, says the stereotype of athletes being swindled out of their earnings by bad investment schemes is borne out by the reality.

He told Family Wealth Report: “The vulnerability of NFL players to fraudulent investment schemes is a cause of great concern to those of us who work with professional athletes. A confluence of several circumstances make many NFL players the target of a wide variety of investment scams: youth, lack of sophistication in financial matters, environment of trust and sudden wealth.”

For these players, their lives are “extremely focused on the demands” of their careers, and just 50 per cent graduate college, putting them at a disadvantage when it comes to finance and economics, explains Landsman.

Many players end up buying into high-risk private equity investments such as oil and gas limited partnerships, restaurants, entertainment facilities, car dealerships, airplane hangers, self-storage facilities, offered under misleading pretenses in terms of their liquidity and risk, says Landsman.

What makes this harder to recover from is that – in the case of an NFL player – the average career lasts only 3.5 years, according to Landsman, meaning that once earnings are lost it might be too late. He cites an eye opening statistic: 78 per cent of NFL players are either bankrupt or in financial distress within 2 years of retiring (source: Sports Illustrated).

Lifestyles of the rich and famous

Some of these post-career cases of hardship are not only due to bad investments but general mismanagement too, particularly on the spending side.

“Nearly 70 per cent of athletes we surveyed in 2008 reported that they lead a luxurious lifestyle. Though they recognize that this could be detrimental to their financial future, only a quarter of athletes reported that they are concerned about paying for that lifestyle,” says Flynn.

However, concerns about earning spans and long retirements are not unique to athletes, points out Tramontano, and may equally apply to people who get rich quickly through financial services, for example, such as successful investment bankers who burn out at a young age.

For any client vulnerable to this problem, Tramontano says Constellation now builds a simple graph, and explains to the client: “Here’s what you need to save to maintain your spending after retirement.”

Flynn points out the benefits of building a strategy for earning income outside of an athlete’s direct field by building a personal brand. Many superstars such as David Beckham and Tiger Woods have created huge brands in their own rights.

“Because of the visibility and popularity of professional sports, the athlete has unparalleled opportunities to generate secondary income. Respected athletes also have access to a wide range of second careers after they retire. Having the right advisors can help the athlete to make sound decisions in support of a comprehensive strategy,” says Flynn.

This tendency for a luxurious lifestyle and high spending means bill payment and tax filing are also important services for athletes, says Flynn, as is asset protection, as their high profiles often giving rise to lawsuits or divorce proceedings.

Another particular situation athletes face, says Tramontano, is that they often feel obligated to support their families – many of whom made significant sacrifices for the athlete along his or her way to success. Tramontano says he would never discourage an athlete from this view, but it’s important to make sure support is given in a strategic and efficient way.

In fact, it may be the case that it is necessary to distinguish more between financial help for families, and investments. For example, the Rothstein Kass research found that 78 per cent of surveyed athletes believed they had been exploited by friends and family.

Privacy and trust: the “lifeblood” of wealth management

It goes without saying that privacy and trust will be at the heart of any wealth management relationship, and in this light athletes are no different from other extremely wealthy clients.

“Many of our non-sports clients are household names and some of our sports clients aren't,” says Tramontano. Whether you're a billionaire business man or woman or a major league baseball player, privacy is of the utmost importance.

“The lifeblood of our business is confidentiality and trust,” says Tramontano.

However, it could be argued this goes one step further with clients such as athletes, as well as actors and artists, who attract the kind of media attention associated with A-list celebrity. They are extremely vulnerable in one sense: reputation damage can lead to the withdrawal of sponsorship contracts, as well as making life very difficult for the athlete (just think Tiger Woods).

“An athlete’s reputation is the most fragile aspect of the personal brand. It often takes a career to establish and can be erased by a single misstep,” says Flynn.

“Social media presents an opportunity for the athlete to connect with fans directly, but also poses risks – from hacked accounts to ill-advised ‘tweets’,” he adds.

Again, this might provide opportunities for wealth managers who include a lifestyle or consulting offering. Flynn says some services around brand management and business consulting can provide potential revenue streams for advisors, especially as less than 10 per cent of agents provide business venture support to clients.

Only fools rush in

It’s not a business that can be rushed into though. “It’s 100 per cent word of mouth and reputation,” says Tramontano. His firm has developed relationships with agents, lawyers and managers in the industry.

Also, it’s about cultivating quality relationships. “We’re not trying to handle every athlete…it’s a rifle approach rather than a shotgun approach,” he adds. With that said, he thinks it’s “a really important time for athletes and entertainers” because “over the last 20 to 30 years compensation levels have really ramped up.”

Tramontano points out that if you look back at the 1970s or even 1980s, players in the NFL didn’t make the kind of money that could set them up for life. “They worked extremely hard – it’s a hard job – but they didn’t make that kind of money.” Now, if they have a few successful years and the money is managed well they can change the rest of their lives and the lives of their descendants.

“If someone had plopped $20 million on my desk as a 20-year old I may not have done a brilliant job,” says Tramontano.

And this is why – when approached in the right way – the wealth management and sports industries can work together with benefits to both sides.