EXPERT Article

Fiscal Fitness

The financial insolvency of professional athletes.

Each year, a new batch of athletes champion their respective sports and are promoted from amateur status to the professional level; achieving their dreams. Performing under the bright lights and being a pro athlete is a popular aspiration among American youth and a common rendition of the American Dream. The rare opportunity to formulate a career through athletic competition fuels the ‘rags to riches’ storylines that beautifully romanticize sports. Coaches and trainers develop players’ natural talent, instilling the fundamentals, stamina, and competitive fire. Molded by rigorous practice and training, these players evolve into the superhumans we idolize. While we know these athletes are physically fit to perform at the highest level, are they fiscally fit? Are they conditioned to manage their six-, seven-, and eight-figure salaries?

Glance Back

Today, the sports business is a multi-billion-dollar industry. This may seem obvious to you and the casual observer because of the barrage of advertisements when watching an event, in-venue or on television. Sports franchise values have grown dramatically with average club values rising “between 10 and 20 times since 1990.” (PwC 2017). They’re trophy assets, overpaid for due to the status and prestige that comes with owning a sports organization. The exclusive and unique nature of being an owner tends to develop a seller’s market, explaining the high multiples used for valuation. These businesses generate massive revenue through these major segments: media rights, sponsorship, gate, and merchandising. Media rights are the fees paid to show sporting events on television, radio, and the internet. Networks line up to pay billions of dollars to leagues for the right to broadcast their content. Corporate sponsors pay millions to align their brand with leagues and teams through advertising and naming rights. With the value of these media and sponsorship agreements escalating to unprecedented levels, ownership groups are spending billions to acquire these franchises! In 2012, the Guggenheim group purchased the Los Angeles Dodgers for $2.15 billion. By himself alone, Tilman Fertitta agreed to buy the Houston Rockets for $2.2 billion.

In a relatively similar fashion, salaries have risen. Did you know that pro athletes used to have to work a second job in the off-season to make ends meet? In 1979, Nolan Ryan, star pitcher for the Houston Astros, became the first professional athlete to earn a million-dollar annually. To better explain this increase in contract values, for simply signing and agreeing to play for a team, average non-starters may earn signing bonuses resembling Ryan’s yearly wage. This figure is common across the United States’ three major professional sports leagues: the National Basketball Association (NBA), National Football League (NFL), and Major League Baseball (MLB). Nowadays, star athletes are courted by teams offering these six-, seven-, eight-, and in rare cases, nine-figure contracts in free agency; not to mention the chance to secure individual endorsement deals with corporations like Coca-Cola and Nike. This inflation of wages brought prosperity for athletes. Nevertheless, there are countless cases, where this rise in income instigated the irrational spending and the demise of giants.

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Mo Money Mo Problems

“By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress… Within five years of retirement, an estimated 60% of former NBA players are broke” (Torre 9).

As wages and valuations skyrocket, financial insolvency amongst professional athletes becomes an increasingly alarming issue. For too many, this influx exposed the financial irresponsibility of these minute millionaires who wasted too much of their income to maintain a luxurious lifestyle. Poor investments, overly charitable actions, gambling addictions, divorce are some of the many ways athletes are lead to bankruptcy or financial distress. In an effort to prevent such, many athletes hire financial planners or advisers to manage their budgets and oversee their expenditures. Unfortunately, financial fraud has been known to occur as these accountants defraud their clients of thousands, even millions. For example, investment adviser Ash Naryan earned the trust of several athletes including former USC quarterback Mark Sanchez. Naryan, who also lied about having a CPA license, defrauded athletes by direct depositing over “$30 million” into his advisory firm (Robinson 2).

The prolonged, fruitful careers of our idols aren’t guaranteed. In fact, they’re rare. The average career in a major professional sport only spans a handful of years. It’s the harsh reality fueled by injuries among other factors. Premature retirement can compound with ignorance, leaving these former athletes in financial despair. Those whose careers lack the longevity and contractual guarantees similar to those of stars, face increased pressure to budget and prepare for life after sport, given that their larger percentages of their six- and seven-figure salaries post-tax would be better saved. Contrary to other industries, professional athletes are only paid in-season. This is the period in which athletes are participating in sport- and team-related activities like training and practicing. Further emphasizing the importance of budgeting and planning to not sustainable levels not only post-career but even in the off-season.

The stars are not exempt. Some may argue that their transition from the limelight constitutes drastic transitions socially and mentally. Compared to non-starter, average, or lower value players, stars of the three major sports generally earn eight-figure salaries. Theoretically, these athletes would have to set aside a smaller percentage than other athletes for post-career life. Yet, it is the stars who are the face of the awareness efforts, because they made poor expenditures and admit they were financially illiterate. Some are even becoming involved, promoting awareness in an effort to prevent this trend from continuing. Once a three-time All-Star and NBA champion, Antoine Walker earned over $100 million during his career and filed for bankruptcy in 2010 due to a gambling addiction. But today, Walker works as a consultant for Morgan Stanley, providing personal insight to financial advisers and their clients (Greenberg 2).

Broaden the Scope

How can all athletes, stars and non-stars, in each of the major sports leagues be helped? Administering a segmented approach through the amateur and professional levels would be paramount in providing a financial literacy foundation with guidance along the way for all athletes, stars and non-stars, in all leagues. Universities can develop classes or workshops instilling the power of personal finance in both student-athletes and the student body. A positive perception of the university and its administration is certain to develop, particularly when recruiting prospective students, athletes, and their parents from the high school level, when the university is investing in the longevity of student-athletes.

Leagues currently deploy versions of a “rookie development program,” yet these initiatives focus on league policies, culture, and expectations. They could fill this lapse in financial development with the help of agencies or financial services companies. Through a contractual agreement, leagues can enlist in a company to deploy and facilitate regular, league-wide financial literacy workshops and the financial planning and advising of rookies throughout the duration of their rookie season. With the help of agencies or financial services companies held under a contractual agreement, leagues could fill this void by facilitating financial literacy workshops. This deal would require the firm to develop mandated and in-depth courses that cover concepts like planning, budgeting, setting goals, and investing.

Father Time is undefeated. When the playing days come to an end and the game checks stop coming in, these athletes will need a plan and the necessary skills and savvy to execute that plan. A firm or agency can fill this role and develop a benchmark program to provide young professionals an educational foundation at the beginning of their athletic career to better secure a long and prosperous life after the final whistle blows.

Works Cited

Cohen, Ben. “Houston Rockets Fetch Record $2.2 Billion in Sale; Houston Billionaire Tilman Fertitta Bought the NBA Team in a Deal That Continues the Trend of Soaring Valuations Around the League.” Wall Street Journal (Online) 5 Sept. 2017: n/a.

Greenberg, Gregg. "Former All-Stars From NBA, NFL Join Morgan Stanley's Sports Group." 15 June 2015. https://www.thestreet.com/story/

PriceWaterhouseCoopers (PwC). “Sports Outlook: At the gate and beyond”. October 2017. http://www.pwc.com/us/sports

Robinson, Matt. "Ex-Jet QB Sanchez Among Athletes Cheated in Investment Fraud". Bloomberg. 22 June 2016. https://www.bloomberg.com/news/

Torre, Pablo. “How (And Why) Athletes Go Broke”. 23 March 2009. Sports Illustrated. https://www.si.com/vault/