News & Analysis

The Greatest Threat to Professional Sports: Financial Illiteracy

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Floyd Mayweather, Lionel Messi, Cristiano Ronaldo, Conor McGregor and Neymar (left to right) were five of the world’s highest paid athletes in Forbes latest rankings. (Composite Image/AP Photos)

For many professional athletes, the first paycheck is the breakthrough moment that validates their commitment and perseverance. However, what many fail to realize is that what follows this first testament to success is equally, if not more, important for their futures than the journey there. Players have a difficult time grappling with the large sums of money suddenly dropped in their bank accounts, and instead of investing in long-term assets, they lackadaisically spend as if their next contract is guaranteed to arrive. The reality is, however, that next big contract never arrives; the average career length for the NFL is just 3.3 years, NBA 4.8 years, and MLB 5.6 years. While fans and analysts scramble to define the greatest wrongdoing or dilemma in their respective games, whether it be “juiced ball theory” in baseball or “deflategate” in football, almost everybody overlooks the most egregious and saddening issue in sports: a lack of basic financial literacy among athletes.  

The relationship between players and agents has been vital to the development of the sports industry, especially since 1925, when star college football player Red Grange hired C.C. Pyle as his agent to negotiate his contract with the Chicago Bears. Grange was paid nearly 50 times the average NFL salary thanks, in part, to his on-field accomplishments, but largely due to Pyle’s innovative negotiating tactics that included accepting a lower game salary for a 50% share of ticket revenues. Grange and Pyle revolutionized the sports world by demonstrating that sports were not merely a leisurely weekend spectacle for the upper-class but rather a dynamic business that one could monumentally profit from. 

The monetary blessing granted by  professional sports, however, often causes many players, who often make more per game than the average family does in a decade, to face economic instability and even bankruptcy. This author is not saying that players are overpaid, but, rather, that it is statistically proven that many athletes are unable to handle these new, large sums of money. Some are victims of fraud, and others of their spending habits, but all who find themselves in financial distress are often lacking basic financial literacy. CNBC estimates that nearly 60% of NBA players go broke within five years after retiring, and nearly 80% of NFL players face “financial tensions” within two years of retirement. These numbers are deeply saddening not only because of the vast amount of money lost but because these failures could so easily have been avoided. 

Aware of their own level of knowledge, athletes often trust their entire futures to their agents and financial advisors, but this combination of trust and massive informational asymmetry all too often leads to athletes being defrauded of their rightful earnings. The SEC filed charges on August 29 against Cambridge Capital Advisors, LLC, a Florida-based investment management group, for defrauding over 70 NFL clients. Most of these players had sought out the firm after joining a class-action lawsuit against the NFL for game-related brain injuries, for its alleged specialization in settlement advance loans. Many of these clients rolled over their 401k retirement accounts into hedge funds set up by Cambridge executives Phillip Howard and Don Reinhard for the scheme, practically losing everything. Sadly, this is only the most recent example to come to light that demonstrates the vulnerability of professional athletes’ finances. 

Chris Dudley, a Yale graduate and retired NBA player who played for five different franchises across 16 years, offers his two-cents on financial lessons for athletes. He suggests that athletes “take ownership of their money and keep constant track of what their advisors are doing with it [since] athletes in their prime earning years can develop a detachment from their own money.” Just as people from all walks of life do, athletes place an exuberant amount of trust in financial advisors and, at times, develop a screen between them and their money. In the case of athletes, however, they typically have a greater amount of capital and a lower knowledge base than the average worker does. This, combined with fandom and star-power, often makes them a target for malevolent actors. 

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Kobe Bryant with his, and his investment firm’s, favorite sports drink, Body Armor. (Danny Moloshok/Associated Press)

However, not all athletes are reckless with their hard-earned money. Kobe Bryant, Magic Johnson, and Michael Jordan are three of the most prominent success stories in athletic history. These men leveraged their massive paydays on the court into even greater and more sustainable returns in the financial market. Kobe Bryant, for example, opened a private equity firm, Bryant Stibel Investments, shortly after retiring with well-respected Web.com executive Jeff Stibel. One of Bryant and Stibel’s most notable decisions was back in 2014 when they acquired a 10% stake for $6 million in the sports drink company Body Armor; In August 2018, Coca-Cola acquired a minority position in the company causing the valuation to sky-rocket and make Bryant and Stibel’s investment now worth nearly $200 million, or a 33x return on investment. All three men took the initiative to become more knowledgeable so they could make wiser financial decisions, including keeping their money in good hands, and it is clearly paying off for them. Bart Scott, a former NFL linebacker with over $60 million in career earnings, is working with Morgan Stanley to educate athletes on investing and basic financial literacy. He makes a fascinating point that athletes like Rory McIlroy and others have expressed in interviews: “You give a 19-year-old a check for a million dollars, he thinks it’s a million dollars… [but] you learn about taxation. You learn about insurance. You learn about how to protect yourself and how to have an emergency fund.” Established financial institutions like Morgan Stanley have a clear interest in helping players achieve financial independence—their clients’ successes are their own. But if, as CNBC reports, financial failure is endemic across the major sports leagues, then the leagues themselves, even if it is not their legal duty, may have the moral duty to help save players from themselves and those hoping to profit from their failure. 

Categories: News & Analysis

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