Many of the youngest Americans to become self-made millionaires this year, student athletes, may also be among those least prepared to keep or grow their newfound riches.
Thanks to a 2021 NCAA rules change that allowed young athletes to benefit from deals monetizing their name, image and likeness (NIL), opportunities now abound for them to augment school contracts with even more lucrative deals off the field. But juggling contracts in the largely unregulated NIL world, while performing on the field and handling other aspects of young adult life, can be a tall order for these students; many come from historically disadvantaged communities with low financial literacy, and are vulnerable to exploitation or scams.
This means it's urgent for advisors to step in early to prevent that, according to Drew Freides, a Barron's top-ranked private wealth advisor at UBS who includes athletes among his clients.
Drew Freides, a private wealth advisor at UBS.
UBS
"Historically, it's just been, okay, you sign your rookie contract when you're a professional athlete, and then you've got your various sponsorships and deals," Freides said in an interview. "But this pushes that time frame up to college and in some cases, high school."
UBS posted a public white paper in mid-September called "The NIL Playbook," which aims to establish the legacy Swiss wirehouse's credibility with athletes in their early stages of wealth-building. The paper, written in a consumer-friendly tone, outlines key financial steps for athletes to take: seek education around basic finance skills like banking, understand the time value of money and role of compound interest in investing, watch for NIL rules that vary by state and school, build a trusted support team, treat oneself as an entrepreneur, manage one's brand, prepare to pay income tax and evaluate insurance options.
"This is a great time for the whole industry to take a deep dive … on teaching their student athletes the basics around finances," said Wale Ogunleye, the head of UBS's Athletes and Entertainers client segment, in an interview about the paper, which he said the firm offers as a self-education tool for young athletes in addition to the financial literacy seminars it delivers to athletes at colleges with big sports departments.
Adewale "Wale" Ogunleye, the head of UBS's Athletes & Entertainers client segment.
UBS
"Ninety-nine percent of these young men and women will not make it professionally. So let's let them leave universities with a skill — maybe knowing how to budget, knowing what a credit score really means. Maybe understanding why they shouldn't get that credit card, just because it came with a free pizza on campus," said Ogunleye, a former NFL pro athlete himself.
As the fast-changing NIL landscape leaves many young athletes struggling to understand the rules, and the new school year brings fresh NIL deals, advisors can differentiate themselves by offering timely suggestions that set athletes up for long-term success.
Below are six tips from experts for NIL planning.
Closely review all NIL contracts
Phil Reynolds, managing member at TBH Advisors.
Stephanie Bullock
Many NIL opportunities will come an athlete's way, but few may be worth their time. "It's like the wild, wild West, when there's not much regulation," Phil Reynolds, a certified financial planner who works frequently with athlete clients, said of the NIL deal world.
Reynolds is a managing member at TBH Advisors, a registered investment advisor based in Brentwood, Tennessee. He sees schools beginning to hire "in-house NIL key resource employees," but finds that student athletes would be best served having a good agent and a lawyer review with them all the contracts that come their way.
The key point, Reynolds said, is understanding the terms of the deal: What responsibilities must the athlete fulfill, to receive the promised compensation? Obligations could include anything from creating social media posts to attending meet and greets, to signing autographs or starring in ads. Equally important: "What latitude does the company or sponsor have, when it comes to deciding upon whether they've met those responsibilities to receive compensation?"
The athlete will want to ensure that they can terminate the contract and push back against restrictive language that could force them to stay legally bound to a dud deal, Reynolds said.
Finally, advisors should help clients secure their intellectual property, Reynolds said, by ensuring that the group they're licensing their NIL to doesn't have that ownership "into perpetuity."
Prepare clients to walk away from subpar deals
Even if a deal seems promising and the due diligence checked out at first, there's still a risk that the other party may not uphold its end of the bargain.
It may be when the client realizes that the duties they signed up for, which seemed reasonable at first, have become burdensome or more than expected. Or it could be a disorganized, inexperienced sponsorship partner whose events "are not up to par," said Reynolds, who's had clients exit contracts for those reasons.
"Essentially, the company wasn't holding up their end of the deal to make it seamless and easy on the client. And their time, especially during the season, is so tight that the last thing they want to do is be dealing with headaches, potential stress, from a scheduling standpoint."
Most of his clients have not experienced this kind of disappointment, having conducted thorough due diligence first. Clients should ask themselves: "What is the messaging of that company? How do they want you to amplify that messaging?"
Engage with their parents
Some young athletes an advisor works with will be legally considered children. Some could literally be children.
In June, a 9-year-old boy from Snoop Dogg's Youth Football League named Ghalee Wadood Jr. scored an NIL deal worth six figures with the Family 4 Life sports agency — but when he signed, he had to ask his father what a sports agency was.
An advisor to young stars like Wadood will need to build a solid relationship with their parents or guardian, as well as with the athlete.
"From a high school standpoint, parents are becoming very, very engaged now with their kids' finances, earlier than normal," Ogunleye said, adding that parents have been using social media tools like LinkedIn to learn about their child's advisors and even reach out to them.
Earlier this month, Ogunleye received a text message from a parent whose son is "probably going to be a top NBA draft pick in a couple years." The parent asked Ogunleye for help navigating NIL for their child. While some parents may be financially savvy, others need financial education to support their child to make healthy decisions.
Give clients permission to fail
Among today's young athletes, Freides said he's seen "many failures" where "people just blow through the money they've got." While many are only focused on the offensive game of making their wealth, Freides thinks of himself as playing defense for them, though wealth conservation.
However, saying "no" to an athlete's wishes and interests, even if they seem imprudent, is the wrong approach, Freides has learned. "I can tell them all day long, but they have to learn for themselves."
So the trick is to talk through the pros and cons of each option and give that client permission to make risky decisions that could turn out wrong — but contain the risk to a tiny part of their overall portfolio.
With crypto, for example, some athletes may be determined to invest in it. "Okay, if you want to try it, let's do it. But let's do it in an amount that if it goes wrong, it's not something that leaves a permanent scar on them financially."
Athletes should consider an LLC, or limited liability company, to receive NIL income, Reynolds said — a tip that UBS also recommended in its white paper.
"A lot of times, that can be a single member LLC, what's also called a disregarded entity," he said. "It does give them some protections, but it also allows them to do some tax planning around that compensation to reduce the tax liability associated with it."
Many athletes are paid as 1099 contractors, meaning their paycheck doesn't include prepaid income tax — so they'll need to prepare to set aside some money for taxes. To help reduce that tax bill, Reynolds said, another strategy can include retirement plan contributions such as to an SEP IRA or a solo 401(k).
Watch interest rates closely
Athletes who make it into some money often desire to repay the love and sacrifice of family members — typically, by purchasing a big house for their parents.
Yet in the current high interest environment, it's especially important to press pause and discuss how to budget appropriately for those emotional purchases, Freides said. If a house is needed as shelter, that's one thing. But given elevated mortgage rates which may fall in a year or so, and the potential for the economy to still see a "soft landing or hard landing," it's especially important not to overextend, he added.
"It's consistent. They want to buy the car, they want to buy the house for their family," he said. Again, naysaying that in the name of fiscal prudence can come off as failing to relate to their life circumstances.
Instead, Freides will say: "Okay, it's great to do that for Mom, but let's figure out the appropriate size. Let's not go bonkers. Let's do something that doesn't financially leave you in a huge pothole. … So it's helping them work through the answers rather than just telling them no."
Freides said one great alternative place to park athlete savings now is bonds, which yielded more recently because of higher interest rates. "It's better for people who want to be more conservative because now they can finally get some more income that they weren't seeing."
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