Business

This business of sport and why most athletes end up broke — Part 2

The Sterling Report

With Kevin Richards

Sunday, May 11, 2014    

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LAST week we began our series on why athletes go broke, and this has generated some interest and started a conversation around financial planning for persons who earn lots of money but who have limited financial knowledge. We continue with some of the other reasons cited in the report identifying reasons why some top athletes go broke long before retirement and how they could mitigate some of the risks associated with being a professional athlete with a propensity to spend.

The fourth reason cited in Wyatt's research was poor investment decision making. The truth is everyone has an investment deal to finance and every pitch is about the best deal ever that will make the investor a gazillion dollars. Obviously, a professional athlete, aware of how many of his or her predecessors have gone bankrupt, believes that this investment option will be the panacea for all his or her future financial stresses. Evander Holyfield had a record label, for example, which had very little success and landed the former boxer in debt. Evander may have had the gift of the one-two punch, but his rhyming skills were not world-renowned. Restaurants are a favourite business venture of professional athletes, who somehow believe that many a fortune has been made in the restaurant business by remote managers. Very little can be said about the motives and intentions of these persons who approach athletes, but a good sign would be whether these persons are prepared to put their money behind these ventures or if the athlete takes all the risk.

Finally, and certainly not least of all of these reasons, Wyatt identifies being in the wrong company as a top reason explaining why athletes go broke. Interestingly, the wrong company may not be just the dodgy friend from the old neighbourhood, but could reside in the very same home as yours. Aranxta Sanchez Vicario is reported to have lost all her tennis fortune to her managers, who happened to have been her parents. Mike Tyson's divorce from Robin Givens is also one for the legend books, and numerous professional ballers get stung by multiple marriages and divorces and countless child support payments. At some point after wife number five, it should be clear it is really not about real love. Choosing an investment manager is also a point to note in the course of dealings with athletes. Oftentimes athletes are completely unaware of their true financial position and end up facing the courts for tax evasion or being liable to third parties for acts done "on their behalf" but, without their knowledge.

Although not stated in the research by Wyatt, an often overlooked source of bankruptcy for a number of athletes is medical. Athletes are very prone to injuries due to the competitive nature of sports in general and the need to go the extra mile to remain viable. Numerous surgeries and physiotherapy sessions as part of maintaining their fitness and marketability could run into millions in some cases. It could be even more acute in contact sports such as boxing or American football, which perhaps explains the high payday for these athletes.

There are a few points to note from the local case. Many local athletes believe they are not as prone to the level of bankruptcy as these NFL and NBA athletes because their first impulse isn't to buy a US$250,000 Italian-make convertible or a 19-bedroom mansion on the lake with custom bowling alley and amusement park. The reality is that there is the local variety which tends to manifest itself in the extensive entourage and the nights of "flossing". Real estate can be a good and bad thing, but a purchase for vanity should never be considered a purchase as an investment. Also, there is really no difference if the US athlete buys one Lamborghini for the equivalent of J$30m versus the local one who buys nine (9) cars and spends the same amount of money.

We should acknowledge that we have come a long way in terms of financial awareness by athletes. Some have started to put things in place such as retirement nest eggs and choosing the right investment manager. Once athletes learn that it is okay to put their wealth in a bond or mutual fund that yields seven to eight per cent, rather than the get-rich-quick schemes they get shown on a daily basis, things will be better for their financial security. If, for example, an athlete invested US$15,000 per annum at a rate of eight per cent and compounding the interest, in twenty years they would have a pot worth just under US$900,000. There are portfolio managers like Sterling, for example, who have managed portfolios that have consistently returned better than market performance at 14 per cent per annum. Transparency is key in the management of their finances and it would be in their best interest to take an active role in the management of their affairs to avoid the pitfalls that so many have gone through in the past.

Kevin Richards is Vice President, Sales and Marketing at Sterling Asset Management Ltd. Sterling is a licensed securities dealer and provides investment management and advisory services to the corporate, individual and institutional investor. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, please e-mail us at: info@sterlingasset.net.jm or visit our website at www.sterling.com.jm. Like our page on Facebook and follow us on Twitter.

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