Wednesday, March 25, 2009

Why Million Dollar Athletes Go Broke

Warren Buffett is good at managing his money. So is Bill Gates, apparently, and so is Mike Bloomberg.

You know who's not great at managing their money? Guys who leave college to play pro sports.

Sports Illustrated has a great piece this week about how and why these guys who sign million dollar contracts almost always end up broke. We've all read the anecdotes. Just this year, ex-Broncos running back Travis Henry was jailed for failure to pay child support. Panthers receiver Mushin Muhammad put his house up for sale after being sued for outstanding credit card debts. Saints running back Deuce McAllister filed for bankruptcy protection for the Mississipi based car dealership he owns.

In his article, Pablo Torres goes beyond the random stories and compiles some hard data:
  • By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.
  • Within five years of retirement, an estimated 60% of former NBA players are broke.
  • Numerous retired MLB players have been similarly ruined, and the current economic crisis is taking a toll on some active players as well.
Torres documents scores of Major league players who have lost their savings or had their assets frozen because of fraudulent investment gurus like Bernie Madoff and Robert Allen Stanford. But it's not just the big crooks who come after the athletes. These athletes fall prey to "advisors" that come recommended by friends, many of whom are completely unqualified. According to the NFL Players Association, at least 78 players lost a total of more than $42 million between 1999 and 2002 because they trusted money to financial advisers with questionable backgrounds.

Aside from shaky investments, what are the other reasons why most pro athletes end up broke? Some of it is just lavish spending. Young kids with little impulse control suddenly have more money than they ever imagined. They buy cars and Rolex watches and spend $20,000 on a big night out at a nightclub. Many of them find it hard to say no to friends and family members who want to share in the newfound prosperity.

But Torres relates a story told by Raghib "Rocket" Ismail, who described a conversation he had with Panthers' owner Jerry Richardson, a former NFL player turned succesful businessman. "What's the most dangerous thing that could happen to us financially?" he asked. "Without blinking an eye," Ismail recalls, "Mr. Richardson said, 'Divorce.'"

In a survey reported by the financial-services firm Rothstein Kass in December, more than 80% of the 178 athletes polled—each with a minimum net worth of $5 million and two thirds under the age of 30—said they were "concerned about being involved in unjust lawsuits and/or divorce proceedings." By common estimates among athletes and agents, the divorce rate for pro athletes ranges from 60% to 80%. In divorce proceedings, of course, husbands routinely lose half of their net worth. But for athletes there is an aggravating factor: when the divorce happens. Most splits occur in retirement, when the player's peak earnings period is long over and making a comparable living is virtually impossible. Such timing is no accident.

It's a great piece, and I think it helps to explain why, in an era when guys can earn hundreds of millions of dollars in their careers, none of them ever end up on the Forbes list of wealthiest Americans.