For many people, professional athletes are on top of modern societies. They are revered, admired, even worshiped like modern day heroes. For those very talented and lucky few it must feel like being on top of the world. There is, however, a very dark side to this fame, almost like a Greek tragedy – about 70% of pro athletes end up with severe financial difficulties and even bankruptcy just 5 years after retirement from professional sports.
Why is this happening? The reasons are multitude as the athletes, like everyone else, differ between themselves, but there are some general similarities.
The lack of financial literacy – this is something that is pervasive in general population but even more so among pro athletes who are recruited for their teams at a very young age, usually right after college or sometimes even right after high school. No one teaches a class about loans, mortgages, savings and investing. Facing sudden wealth, pro athletes hire people to pay their bills and don’t take time to understand their cash flows.
Short Earning Time – many pro athletes earn in a year more than most people earn in a lifetime. At the same time their peak earning potential is very short 5-6 years on the average. It is very human to grow into comfort of wealth and luxury – while forgetting that the massive income comes to an abrupt end. Thus spending on an unsustainable scale is very common – spending as if millionaire income is here to stay in perpetuity. This is exacerbated if the star athlete is surrounded by a group of friends, “entourage” that encourages this behavior.
A successful professional athlete is performing on a level that’s well above regular population and as such is used to winning mentality. While this serves them well in their sport, it’s detrimental for the investing and long term financial well-being. It translates into chasing “unicorns”, next “great idea” without considering that vast majority of new ventures don’t come to fruition.
All this is a fertile ground for unscrupulous salesmen who see the wealth and financial naïveté as a way to sell investments and products that are very high risk, which the pro athletes do not understand, and which unfortunately leads to massive losses.
The athletes’ managers can play a central role in avoiding this unfortunate downfall – by educating their players in the realities of their careers and establishing a relationship with those financial advisors that are fiduciaries – those who will put the interests of their clients above their own.