The Unique Financial Challenges of Professional Athletes
Making it as a professional athlete is a big deal that often offers a correspondingly big paycheck. Particularly in the NFL, players have the potential to become millionaires overnight. While making this type of money is a great payoff for your years of hard work, it also presents its own set of challenges and risks. A fiduciary financial advisor can help you make smart decisions regarding your paycheck, investments, taxes and savings.
What is a fiduciary financial advisor?
A fiduciary advisor is held to fiduciary duty standards, which means that he or she is legally obligated to act in clients’ best interests, at all times and in all situations. As part of that fiduciary duty, financial advisors have both a duty of care and duty of loyalty. The duty of care includes not only providing advice that is in the best interest of the client, but that the advice is executed in the best way possible for them and the advice is ongoing throughout the client’s relationship. The duty of loyalty means the advisor may not put their interests ahead of the clients.1 Fiduciary advisors are typically fee-based, which means they are usually paid a percentage fee based on the assets they manage. This helps align the advisor’s interest with those of the client because the advisor’s fee grows in proportion with the client’s assets.
In contrast, some advisors charge a commission and generally conduct transaction-specific recommendations versus advice that covers the entire client relationship like a fiduciary advisor. These advisors are held to a best interest standard at the time of the recommendation that the investment is suitable for the client.2 This means they must put the client’s interests before their own and “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer.”3 Because they’re often paid commissions for the investment products they sell, they may be incentivized to push products and make frequent portfolio transactions that could create a conflict of interest with what is best for the client.
Why it’s important to work with a fiduciary advisor
There are several reasons why choosing to work with a fiduciary advisor is vital to your long-term financial success as a professional athlete.
A lifetime of earnings in a few short years
The career spans of professional athletes are significantly less than those in other professions. Athletes have, on average, 3.3 years in the NFL, 4.5 years in the NBA and 5.6 years in MLB.4 5 6 Even with a multi-million-dollar salary, that’s not a lot of time to save enough to last a lifetime. A qualified fiduciary advisor who has experience working with professional athletes can help you develop a budget, spending and investment plan that meets your needs and helps stretch out your earnings.
Attention from unscrupulous “advisors”
As soon as you sign on the dotted line of your professional contract, you’ll be flooded with calls and emails from various financial “advisors” who all claim they can help you turn your millions into even more. The problem is, not all of these advisors are well-qualified or have the right experience to help you. Not only is a fiduciary advisor legally obligated to put your best interests first, but they should take time to explain every potential decision to make sure you’re comfortable and onboard with all actions taken on your behalf.
Unique tax considerations
There’s no way around it; professional athletes’ taxes are complex. Competing across the country means you’ll need to file taxes in multiple states, based on each state’s unique requirements. If you earn money overseas, you’ll need to report that income to both the IRS and the country in which you earned the money. Depending on the circumstances, you hopefully won’t be taxed twice on this income7, but you will need to track it in order to qualify for a U.S. tax credit on income earned abroad. Add to that income earned from endorsement deals, investment dividends, etc., and your tax situation become quickly becomes incredibly complex. A fiduciary advisor will work alongside your CPA and other professionals to implement a tax planning strategy that is in line with your overall financial goals. By taking a holistic approach to managing your finances and taxes, your advisor can identify opportunities to legally minimize the amount of taxes you owe through strategies such as charitable giving, tax-loss harvesting, retirement plan contributions and more.
Life after sports
While it may be hard to imagine when you’re actively competing as a professional athlete, you will inevitably leave your sport behind at some point. The idea of life after sports can be both terrifying and exhilarating. What will you do when you’re no longer a professional athlete? What are your dreams for the future? What lifestyle do you envision? A fiduciary financial advisor will help you establish a plan for life after your career as a professional athlete. Regardless of whether your career ends exactly as you planned or is cut short unexpectedly by an injury or other unforeseen event, your advisor will help you successfully transition to the next chapter of your life.
At Creative Planning Sports and Entertainment, we focus on providing fiduciary advice to professional athletes and entertainers. As a specialty practice of Creative Planning, we are supported by the resources of a nationally recognized firm. We deliver a team of credentialed, educated, experienced and action-oriented advisors, including CERTIFIED FINANCIAL PLANNER™ practitioners, certified public accountants, insurance specialists, attorneys and other professionals who work together to develop custom financial plans that take into consideration a wide range of factors, including the client’s current financial situation, goals for the future and any specific challenges that may stand in the way of the client’s financial success.
For help building your financial plan, please schedule a call.
Footnotes
- https://www.sec.gov/rules/interp/2019/ia-5248.pdf
- https://www.sec.gov/rules/final/2019/34-86031.pdf
- https://www.finra.org/rules-guidance/key-topics/suitability
- https://www.statista.com/statistics/240102/average-player-career-length-in-the-national-football-league/
- https://dunkorthree.com/nba-player-career-length/
- http://baseballreflections.com/2020/03/19/career-paths-for-baseball-players-after-professional-sports/
- https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion
