How financial planners can help athletes navigate sudden wealth

March 6, 2023 9:22 PM

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Whether it's March Madness, the Super Bowl or the World Cup, an advisor's athlete clients can be inundated with wealth and opportunities to make more money just as they reach the pinnacle of their careers.

With the NCAA tournament just around the corner, some of college basketball's biggest stars will have a platform to showcase their talents. For dozens of players, those games and their performances could be springboards to the NBA draft and multi-million dollar contracts.

The big question for athletes and wealth advisors alike is how to approach those openings — and the risks that come with them.

"Players have an inordinate amount of what I like to call 'incoming,'" said Mason Champion, a financial advisor who is also a global sports and entertainment director at Morgan Stanley.

"It can be dizzying and confusing and difficult for players to handle that, if they don't have the structure and the protocol in place to support the receipt of that incoming," he said.

A sudden "incoming" — meaning a windfall of money and prestige — tends to happen at the outset of an athlete's career: being drafted into a big league and receiving a signing bonus, for example.

Other times, the bonanza can come later in a career, "like through a windfall associated through a second contract or third contract," Champion said.

"And then even other times it might be through off the field opportunities that are inherent to their brand growth."

Branding deals can be the most lucrative. They include speaking engagements, autograph signings, media appearances and sponsorship opportunities, as well as broadcasting considerations or one-off unique brand licensing.

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Following an NCAA rule change in 2021 that permits college athletes to monetize their name, image and likeness while playing on the team, branding deals have become more common for younger athletes. Thanks to so-called NIL, income streams can reach millions of dollars, vaulting such an athlete instantly into high net worth status.

Louisiana State gymnast and TikTok star Olivia Dunne, who USA Today reported last fall was worth an estimated $2.3 million in NIL valuation, is one prominent example of such stars.

Financial Planning spoke with three expert wealth advisors about how to help young star athletes as the market for serving them grows. Here are a few of our top takeaways.

Start with education

Sometimes the basics aren't so basic.

"Unfortunately, improper or non-existing cash flow management is remarkably prevalent," Morgan Stanley's Champion said. "Far too frequently, that leads to sideways circumstances."

Helping athletes manage their bills and budget appropriately, along with resisting lifestyle inflation and saving for the future, is key.

"The education definitely has to start now while these kids are in college, especially since they are now getting paid" more through NIL, said Patrick Brown, a financial advisor who is the director of risk management and insurance at Edmonds Duncan Registered Investment Advisors in Lawrence, Kansas.

Patrick Brown, a financial advisor who is the director of risk management and insurance at Edmonds Duncan Registered Investment Advisors, is also the leader of Financial Literacy For Student Athletes.

Without the right guidance and support, the dollars an athlete has worked so hard to earn can easily slip through their fingers — especially since athletes often come from socio-economic backgrounds where they lacked exposure to financial education growing up, Brown said.

Many college athletes are from Black communities that historically have faced challenges and discriminatory practices that hampered their efforts to build generational wealth.

They might be eager to give back immediately to their families or finally enjoy a better standard of living, but in doing so harm their future selves — especially given the brevity of so many athletic careers.

The press is all too familiar with stories of athletes who go broke. Some also pass away tragically young, without an estate plan to ensure the passage of that wealth to those they intended it for.

Brown, a former college football player himself, remembers how hard it was to learn about stocks and mutual funds for the first time in a college class. He later created an organization called Financial Literacy For Student Athletes that teaches student athletes how to handle money productively, addressing what he sees as a glaring lack of support for them in the educational system.

"I mean, it sounds good. The schools are saying yes, we are NIL, these kids can make money," Brown said.

"But the education that goes with it — are you setting these kids up for failure? I don't know."

That's where financial advisors step in and help athletes understand how to put their windfalls into a long-term perspective that aligns with their future goals.

Champion said before a playing season even begins, his group has a game plan in place for each player to help that player understand what their expected cash flow will be for both the season and year to come.

"That game plan remains central to not only the accomplishment of their seasonal objectives, but also the long term wealth plan."

Get ready for tax time

Many athletes don't realize how much they have to pay in taxes, which takes a hefty chunk out of their paychecks.

"Taxes is a huge, huge thing, because a lot of these kids are getting paid by 1099," Brown said.

1099 forms, which pay athletes as independent contractors rather than as employees, do not withhold tax, meaning the following spring that athlete could owe hefty payments to the Internal Revenue Service.

"If you're going to do an NIL deal for a restaurant, and hypothetically for the sake of this conversation, you get paid $20,000, that's a $20,000 check going right to that student athlete," Brown said.

"Now that student athlete has to understand: hey, look, a portion of this has to go somewhere else. I don't see it. And so I can use it to pay taxes later on, when the tax bill is due."

Independent contractors must prepay their expected taxes quarterly. They face a 15.3% self employment tax because nothing is withheld for Medicare and Social Security, as it is for salaried employees.

Jorrell Bland, an associate wealth advisor at Mitlin Financial.

Athletes also have to prepare to pay "jock taxes" to every state they play in, as well as in their resident state, according to Jorrell Bland, an associate wealth advisor at Mitlin Financial. "Most people don't realize that," Bland said.

Helping athletes understand the variety of tax-advantaged benefits they can get from the NFL, for instance, or by socking away funds in protective retirement vehicles like an SEP IRA, IRA, or 401(k), can help considerably, Champion said.

"A lot of people don't realize that the NFL actually has a lot of retirement (options)," Bland said, adding that it offers a pension program in which players qualify by having just three seasons of league membership — specifically, being on the roster at least three weeks of the season. The NFL also offers a generous two-for-one match on 401(k) contributions up to a certain limit, Bland said.

Keep their 'friends' close

Bland said many athletes have people from their communities who "latch on," demanding their own cut of the athlete's success when they come home.

"Once they get to that next level, if they can make it to that next level, everybody tends to have that hand out and say, 'hey, remember when?'" Bland said.

"It's a situation where now, you've got 15 people who are going everywhere with you, you're paying for everything. They don't really don't add any value to you," Bland said.

Telling a client to avoid such friends or family members isn't advisable, Bland said. Instead, he encourages athletes to put them to work on a salary and "make them earn it," so that they contribute actively to growing the athlete's wealth in a win-win manner.

"Make them in charge of your social media, make somebody as the driver. So that they don't just see you as an unlimited bank account," Bland said.

"Because at the end of the day, when the money is gone, so is everybody else."

Create a personal board of directors

The right supporters can make all the difference.

"I advise my players to consider their team of advisors as a personal board of directors," Champion said.

This helps an athlete see themself as an entrepreneur who is taking ownership of their career and its income as a business, with different trusted professionals each playing key roles in guiding them.

Mason Champion, a financial advisor who is also a global sports and entertainment director at Morgan Stanley.

Board members might include their talent agent, financial advisor, business manager, mentor, personal assistant or in some cases a lawyer, Champion said.

As these individuals collaborate and weigh in with their areas of expertise, "then the player can make an informed decision," he said.

In particular, the financial advisor can work with the agent and business manager to plan how to allocate new windfall amounts that they expect their client to receive.

Bland added that hiring good public relations staff to help an athlete protect their brand is critical. "You want to make sure that you're protecting your brand, because that's really important when you're looking at potential endorsement deals," he said.

In his practice at Mitlin, around 10-15% of Bland's clients are current or former athletes. For many athletes he knows or serves, "their endorsement deals are 60% to 70% of their total income for the year."

Medical specialists to help the athlete monitor and protect another key asset — their health — is also a good idea, Bland said.

"You should have these people in your corner because they can really change the trajectory of your career," he said.

"Just make sure that you can trust these people and they have a track record of doing the right thing for their clients."