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Going for broke

This was a shocking statistic that I heard on NPR yesterday: By the time they have been retired for two years, 78 percent of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce. The problem isn't just confined to professional football players. Within five years of retirement, an estimated 60 percent of former NBA players are broke. The problem extends to professional baseball and hockey players as well. This was the subject of a recent Sports Illustrated Article.

The problem is that these guys have been more or less taken care of their entire lives. Someone else always worried about the details, and all they had to do was focus on the ball. They don't particularly care about anything in school, except for keeping up their eligibility to keep on playing. And they don't learn the tools of how to manage so much money. Their investments tend to be stuff that's tangible: nightclubs, car dealerships, spa or sports innovations, clothing companies. They don't really get involved in securities or other safer investments that have a decent return. SI says:
For the risk-averse investor, an adviser such as Butowsky would suggest allocating 5% to private equity, 7%--12% to real estate, 50%--65% to a mix of public securities (stocks, mutual funds and the like) and the rest to alternatives such as gold and hedge funds. Yet with athletes, who are often uninterested in either conservative spending or the stock market, those percentages are frequently flipped. Securities are invisible, after all, and if you don't study them, they're unintelligible. Not to mention boring. Inventions, nightclubs, car dealerships and T-shirt companies have an advantage: the thrill of tangibility.

Many players, consequently, are financial prey. "Disreputable people see athletes' money as very easy to get to," says Steven Baker, an agent who represents 20 NFL players. In May 2007 former quarterbacks Drew Bledsoe and Rick Mirer and five other NFL retirees invested at least $100,000 apiece in a now-defunct start-up called Pay By Touch—which touted "biometric authentication" technology that would help replace credit cards with fingerprints—even as the company was wracked by lawsuits and internal dissent. (The players later sued the financial-services firm UBS, which had encouraged its clients to invest in Pay By Touch, for allegedly withholding information about the company founder's criminal history and drug use.)

About five years ago, Hunter says, he invested almost $70,000 in an invention: an inflatable raft that would sit under furniture. The pitch was that when high-rainfall areas were flooded, consumers could pump up the device, allowing a sofa to float and remain dry. "The guy I invested with came back and wanted me to put in more, about $500,000," Hunter says. "Then I met [Butowsky], who just said, Hell no! I wound up never seeing that guy—or any of my money—again."

Hunter, who in November 2007 signed a five-year, $90 million contract, has been able to absorb the loss. But innumerable other athletes have not been so lucky. Former (and perhaps future) NFL quarterback Michael Vick filed for Chapter 11 bankruptcy last July and recently put his mansion in suburban Atlanta on the market. That's partly because he is unable to repay about $6 million in bank loans that he put toward a car-rental franchise in Indiana, real estate in Canada and a wine shop in Georgia. "It's always so predictable," Butowsky says. "Everyone wants to be the next Magic Johnson."

And the people they turn to aren't necessarily any more savvy about business and money managment than they are. Worse, these guys can often be prey for unscrupulous people looking to make a quick buck off a naive athlete. From the SI article:
SALARY ASIDE, the closest analogue to a pro athlete is not a white-collar executive. It's a lottery winner—who's often in his early twenties. "With athletes, there's an extraordinary metamorphosis of financial challenge," says agent Leigh Steinberg, who has represented the NFL's No. 1 pick a record eight times. "Coming off college scholarships, they probably haven't even learned the basics of budgeting or keeping receipts." Which then triggers two fatal mistakes: hiring the wrong people as advisers, and trusting them far too much.

"That's the killer," Magic Johnson says. Johnson started out by admitting he knew nothing about business and seeking counsel from the power brokers who sat courtside at the old L.A. Forum, men such as Hollywood agent Michael Ovitz and Sony Pictures CEO Peter Guber. Now, Johnson says, he gets calls from star players "every day"—Alex Rodriguez, Shaquille O'Neal, Dwyane Wade, Plaxico Burress—and cuts them short if they propose relying on friends and family. "It won't even be a conversation," says Johnson. "They hire these people not because of expertise but because they're friends. Well, they'll fail."

Strickland realized that all too late. In 2001, when a "friend of a close friend" of the nine-year NBA vet proposed a real-estate deal in Georgia, Strickland turned to his business manager: his dad, Matthew, a retired lieutenant colonel in the Air Force. The paperwork on the plot of land, which was on sale for $1.8 million but supposedly had been appraised at as much as $3 million, appeared legitimate, and Strickland bought it. "I trusted my father to help look it over for me because I was hooping and didn't have time," Erick says. "He checked it out. But he didn't go that extra length."

The land wasn't worth anything close to what Strickland was told. "I had to take that hit," he says. "I wish my dad hadn't been put in that position. He just didn't have the knowledge." As for his close friend? Strickland says the man secretly got a cut of the deal, and the conflict caused a permanent "falling out" between them.

And then there's the other family issue.
IN 1996, when Panthers owner Jerry Richardson—a former NFL flanker turned businessman—addressed his players, one of them asked, What's the most dangerous thing that could happen to us financially? "Without blinking an eye," Ismail recalls, "Mr. Richardson said, 'Divorce.'"

Players today would not disagree. In a survey reported by the financial-services firm Rothstein Kass in December, more than 80% of the 178 athletes polled—each with a minimum net worth of $5 million and two thirds under the age of 30—said they were "concerned about being involved in unjust lawsuits and/or divorce proceedings." By common estimates among athletes and agents, the divorce rate for pro athletes ranges from 60% to 80%.

In divorce proceedings, of course, husbands routinely lose half of their net worth. But for athletes there is an aggravating factor: when the divorce happens. Most splits occur in retirement, when the player's peak earnings period is long over and making a comparable living is virtually impossible. Such timing is no accident. "There's this huge lifestyle change," says former NBA center Mark West, a licensed stockbroker who is now the Suns' vice president of player programs. "You and your wife are suddenly always at home, bugging each other. Before, you'd always say, 'I gotta go to practice.' Now you don't have to practice. You have to finish conversations."

Which often involve an incendiary subject: infidelity. "A friend of mine is a football player, and I asked him why he cheated on his wife," says Anita Hawkins, LaTroy's wife of 11 years. "He just said, 'I love her dearly, but I feel like I got married too early and didn't get to do what I wanted to do when I was young.'"
Atheletes don't sign prenups for some reason. Apparently their prenup rate is much lower than for people on a similar economic scale. And of coruse, the inevitable child-support payments are pretty significant.

It's a pretty interesting article. Family and friends kind of become leaches. There's a lot of peer pressure to meet the (expensive) image of a pro-athlete.
SOMETIMES, THOUGH, a jock just can't shake the temptation to try to hit the jackpot. Butowsky believes that "there's something in an athlete's mentality" that drives him to swing for the fences financially—usually at his own peril. "The solution to the problem is, without a doubt, education," the adviser says. "Change won't happen until grown men start wanting to learn."
Go read the article. It's pretty fascinating.



( 3 comments — Say something )
Mar. 25th, 2009 06:41 pm (UTC)
*nods* I've always been aware of these issues, and it's why I absolutely refuse to "work with" student-athletes in the way that the student-athlete office wishes me to, which generall means to just pass them or hold their hands as they do the minimal work to get a 60% in order to get a D. I'll work with the students if they come to office hours, I'll read multiple drafts of their papers, etc. But I'll do that for any student that wants it. I want them out of my class with at least the ability to construct a readable and meaningful paragraph/essay. I will never forget the female basketball player who was in one of my first undergrad courses here -- she slept through class a lot (as did a lot of the Corps members, due to their ridiculous early morning PT schedules, not to mention the sleep deprivation hazing tactics), she could barely read and write, she missed class due to travelling to games and tournaments, and she got an injury in the middle of the semester. I was sick thinking about her future prospects -- the WNBA was barely even started then, and unlike even the miniscule chance that male athletes have to have a professional career in their sport, she wasn't even going to come close to that. At the age of 21, her body had already made that impossible, and I doubt she could've gotten through a McDonald's job application. No alumni was going to hook her up with a job a car dealership...

Student-athletes at Division I schools with huge football/basketball programs are, IMO, horribly exploited. Don't even get me started on how female students are used as reward chips. There may be access to an alumni network that they can use, especially if they're part of a winning program, but the whole system is corrupt.

SALARY ASIDE, the closest analogue to a pro athlete is not a white-collar executive. And yeah. Income isn't even close to being the same thing as wealth.

SOMETIMES, THOUGH, a jock just can't shake the temptation to try to hit the jackpot. Butowsky believes that "there's something in an athlete's mentality" that drives him to swing for the fences financially—usually at his own peril. "The solution to the problem is, without a doubt, education," the adviser says. "Change won't happen until grown men start wanting to learn."

Uh. Yeah. Considering that this starts way before they're "grown men," and other "grown men" are part and parcel of having created and maintained the system (I'm looking at you, university presidents), I hardly think educating professional atheletes after they've inked their contracts is going to do much in the long run.
Mar. 25th, 2009 08:20 pm (UTC)
I once sat through a lecture on NCAA compliance, which is fascinating from a legal point of view. It was pretty fascinating, and the NCAA compliance office at the University whose person was speaking had a full time staff of three people. The head of the office went to every single football game, just to be sure everything went smoothly with each player. One particular case she talked about was a nationally ranked swimmer who moved from one school to another to follow her coach. All sorts of hoops had to be jumped through to get her to the new school, and all I could think was "this kid isn't going to do anything with this later on. Is she at least learning something while at school?"

A few weeks ago, I heard the head coach for the University of Connecticut totally berate a reporter for suggesting that his $1.6 million salary was excessive for a state employee, especially when the state is going broke. He yelled about how his program brings in $12 million for the school (leaving out that it costs about $6) and I was left thinking, those kids do as much, if not more, work than you do. And they're not paid a red cent.

Bring on the farm leagues, and get these kids paid for their work. And in no way, shape or form suggest that they're learning anything in school.

Edited at 2009-03-25 08:31 pm (UTC)
Mar. 25th, 2009 07:19 pm (UTC)
It's interesting you point this out: I am finally reading the "Rich dad" book and while I think the guy is a complete idiot (and probably broke right now with the housing market going boom) he did have an excellent point that people do not learn financial literacy. His statement about "know the diff between an asset and a liability" is an excellent one, probably relating closely to the traditional folklore of knowing "shit from Shinola".

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