First, I want to apologize for taking so long to update this blog (Why Pro Athletes Stink at Money Management!) with a new post. We have been busy and I can’t believe it’s already June 12th! Wow this year is flying by.
Second, I thought I would talk a little bit about professional athletes and their poor money management skills. I was recently reminded through a previous client who just happened to be a retired athlete that not all athletes make bad investment decisions but many sure seem to have bad advisers around them or none at all.
Why Pro Athletes Stink at Money Management!
What is it about professional athletes that make them so bad with money? It’s almost cliché to talk about the ex-MLB player who blew his fortune on ridiculous investments or the former NBA superstar who lost everything in a nasty divorce. While the rate of ex-player bankruptcies are higher than ever before thanks to the global financial crisis, reports from a variety of sources show that ex pro-athletes have always been bad at handling their money. According to a 2009 Sports Illustrated article 78% of ex-NFL players are bankrupt within two years of retirement. Figures from the NBA Players’ Association show that 60% of retired NBA players are broke.
While it’s easy to point and laugh at irresponsible millionaires throwing their money away, it ignores the underlying institutional problems faced by many athletes once they retire. To put it simply, many pro athletes are completely out of their depth when it comes to handling finances. Most are signed up to lucrative seven-figure contracts straight out of college or, in some cases, high school. Many come from modest or poor backgrounds and have no experience balancing a check book, let alone managing millions of dollars in assets.
The average career lifespan of a professional athlete is much shorter than that of other working professionals. A plumber or accountant will have anywhere from 30 to 50 productive working years in his or her life. The NFL’s own statistics show that the average player’s career lasts from 6 to 10 years, with most players having a peak earning period of 3.2 years. NBA players have a career lifespan of 5 years or less (source) while an average MLB career is 5.6 years (source).
When examining pro athlete bankruptcies, patterns start to emerge. Here are four common reasons why so many ex players go broke, with some prominent examples.
1. Bad Investments
In a 2009 Sports Illustrated interview Michael Seymour, owner of UNI Private Wealth Strategies in Philadelphia, states that most pro athletes “lack the time and desire to understand and monitor their investments.”
According to Doug Glanville, former MLB outfielder and columnist for the NY Times, pro athletes are continually bombarded with investment offers. Friends, family, acquaintances from high-school, teammates, total strangers are constantly pitching players with ‘surefire business opportunities’ and ‘can’t fail investment schemes.’ Over the course of his MLB career Glanville reckons he received more mail from investment firms than letters from fans.
Most athletes, unfortunately, are vulnerable to such pitches – especially if they come from close friends, family members or teammates. Needless to say most of these offers are either wildly unrealistic or blatant scams.
Raghib “Rocket” Ismail, former NFL and CFL wide-receiver lost several million dollars on a series of highly questionable investments that never made a return. These include a $300,000 stake in a Hard Rock Cafe knock-off in New England, an inspirational movie, a music label, nationwide phone card dispensers and three shops that sell inspirational plaques to tourists in New Orleans.
Lenny Dykstra, the Phillies center fielder retired from baseball in 1998 and blew at least $40 million over the next 14 years on a series of unsuccessful business ventures. Dykstra tried his hand at starting a car wash chain (this was successful, he sold it), a real estate development company (went bust) and a glossy financial advice magazine for pro-athletes (ceased publication after a few issues). By 2009 Dykstra filed for bankruptcy citing debts of $37.1 million. Dykstra was sentenced to 3 years in prison in March 2012, having been found guilty of bankruptcy fraud.
2. Real Estate Deals Gone Wrong
The 2008 mortgage crisis wiped out the net-worth of a lot of Americans – athletes included. As with everyone else at the time, pro-athletes were investing heavily in real estate, hoping to ride the wave of ever-increasing house prices. When the bubble burst in 2008 many investors lost everything overnight – including a lot of ex athletes who bet big on the housing market. Many pro athletes also tend to buy luxury mansions during their peak earning years, only to find out they are unable to maintain mortgage payments once they retire.
MLB star Jose Canseco walked away from his 7,300-square foot home in Encino, California. Documents showed Canseco owed the bank more than $2.5 million on the mortgage. In a television interview Canseco stated that he had lost between 7 to 8 million dollars in two divorces and “it didn’t make financial sense for [him] to keep paying a mortgage on a home that was … owned by someone else.”
Atlanta Braves pitcher and Cy Young Award recipient John Smoltz is facing foreclosure on a property he owns in Teton County, Wyoming. Smoltz obtained a $1.6 million mortgage in 2005 for a vacant lot, part of the bankrupt Snake River Sporting Club, in the hopes of developing it for commercial or residential use. Some say Smoltz, who has earned around $135 million in his MLB career, strategically defaulted on the property when it became apparent the surrounding area would not be developed by the county.
3. Divorce/Child Support Payments
Pro athletes almost always lose a huge portion of their earnings when they get divorced. While the national average for divorce settlements is about half the husband’s earnings, it is significantly higher for pro athletes. The numbers are staggering; some estimates put the divorce rate among pro athletes as high as 60% to 80%. To make matters worse, most divorce proceedings occur during the player’s peak earnings period, with the settlements calculated accordingly. Once the player retires and sees his income shrink, he usually has a hard time maintaining massive monthly child-support payments.
Tiger Woods’ extramarital affairs cost him dearly in his 2010 divorce settlement. The golfing superstar had to pay an estimated $100 million to his ex-wife plus $20,000 monthly support payments in perpetuity. Woods is far from broke though, having earned an estimated $58 million in 2011 alone.
Boxing great Evander Holyfield may have earned more than $248 million during his career, but that didn’t stop him from filing for bankruptcy in 2008 to prevent foreclosure on his $10 million mansion in Fayette County, Atlanta. Holyfield has been married three times (divorced twice) and has eleven children – his yearly child support payments are estimated to be $500,000. On June 2, 2012 TMZ reported that Holyfield is facing jail time over on charges of not paying court ordered child support totaling $372,097.40.
4. Bad Advice
It’s no secret that pro-athletes are a magnet for yes-men and con-artists. Due to their relatively young age and complete lack of experience in high-finance, it is easy for unscrupulous money-men to sweep in and take advantage of a pro-athlete’s financial holdings. Many athletes don’t even handle their monthly paychecks or bill payments themselves – everything is handed over to an accountant, agent or some other ‘trusted party’ to take care of. This presents the perfect opportunity for unscrupulous accountants to take advantage of clients who are too focused on their season to worry about day to day expenses. Statistics from the NFL Players Association show that at least 78 players lost more than $42 million between 1999 and 2002 to dubious investments recommended to them by financial ‘experts’.
Russian born hockey superstar Sergei Fedorov sued his money manager Joseph Zada, accusing him of swindling $43 million. Although Zada agreed to pay $60 million to Fedorov as a settlement in 2009, no such payment has ever been made. In late 2010 the SEC has filed a civil action against Joseph Zada accusing him of running a Ponzi scheme.
Three-time WNBA MVP Sheryl Swoopes filed for bankruptcy in 2004 despite having made a whopping $50 million over the course of her career. She blamed her predicament on “vulture agents and lawyers.”
Learn from the stars’ downfall – don’t get ripped off! Don’t buy into the hype – if an investment opportunity sounds too good to be true, it probably is. For realistic, no-nonsense advice on how to properly invest your earnings in the real estate market for steady, long-term returns give us a call! We are your San Diego Real Estate experts.