Q&A: Financial Planning for Professional Athletes

Personal finance is personal first, finance second. The guidance financial advisors give to clients will be tailored to them as individuals. When that individual is a professional athlete, advisors are looking at a whole different ballgame.

Professional athletes have access to opportunities the average client simply can’t reach. Their fame can open doors, but it can also cause them to walk through ones they shouldn’t. For instance, pro athletes are in a unique position to profit from creating their own nonfungible tokens, or NFTs, digital assets that represent real-world objects. But should they just because they can?

We spoke with Ron L. Brown, president of R.L. Brown Wealth Management and co-founder of Athlete Essentials, who shares his best advice for financial advisors working with professional athletes, including the pros and cons of creating an NFT. Here are edited excerpts from that interview.

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What are the major differences in how advisors should approach financial planning for professional athletes versus the general population?

Advisors need to approach financial planning for athletes as if they are dealing with a lottery winner.

The prime of athletes’ careers is a very short window of time in which athletes are going to earn the majority of their income. They’re immediately in the highest tax bracket.

From an age standpoint, it would be easy to have a preconditioned thought that these younger individuals should be invested more aggressively. Advisors need to discard that bias because technically, they need to be investing as if their career could end within a couple of years, which is always possible due to injury.

This type of investing is more similar to working with someone who is about to retire in their 60s in a traditional practice.

[Read: Private Wealth Manager vs. Financial Planner]

What are the biggest mistakes advisors tend to make when working with professional athletes?

A big mistake an advisor could make is underestimating the impact of taxes. Any person can see a public salary, but the impact of taxes is dramatic.

There are many factors that impact taxes, such as what city athletes are playing in, what their resident city is and what cities they’re going to be playing in throughout the year.

It’s different than a business owner who is making a lot of money and then has options or opportunities for tax deductions. There are really no perks for athletes on the player income side because there are no tax deduction opportunities on their W-2 income. Athletes do have marketing opportunities and can take tax deductions there. However, marketing income from most of these players pales in comparison to their on-field income.

Advisors also need to understand the individuals that athletes tend to be around will impact their desire to spend due to their notoriety. It’s easy to tell players who earn a ton of money that there’s no way that they can overspend, or they don’t need this or that. For most people, we work for many years, and as we make more money, our lifestyle progressively creeps up. But for professional athletes, everything is accelerated.

Should an advisor encourage a professional athlete client to seek an endorsement deal?

Yes, I think so.

A lot of times agents will encourage deals, and they’ll have either traditional agents or marketing agents that’ll handle that for them. It’s a great idea to have professional help with these opportunities.

If athletes want to attempt to seek out deals themselves, so they don’t have to pay an agent fee, they need to realize the amount of time that goes into it. Athletes have to identify if they have the professional leverage to get the deals done without having to do much negotiating or if they need to strategize and explain to companies why they should work with them.

[READ: How Advisors Can Profit From Small Accounts.]

There has been a lot of news about professional athletes investing in cryptocurrency. What general advice would you give financial advisors helping athletes who are considering joining the craze?

My advice for athletes and crypto is the same as for my general practice clients. You can participate, but just make sure that it is a smaller percentage of your portfolio. I don’t recommend any more than 1% to 2% at the moment. I believe that there is serious regulation on the horizon and a lot of dust that needs to settle before we have a clear direction on which cryptocurrencies will survive.

It’s easy for players to have a fear of missing out and get caught up in what’s hot right now, and this is part of why clients pay advisors to help.

It’s our job to make sure clients keep a level head and give them examples of similar risks from the past, even though those investment assets may have looked different.

There have always been times in the past where things have caught on fire, and it seemed like a no-lose proposition. Once regulation stepped in or the economy took a turn for the worse and those asset classes were exposed, it was kind of like musical chairs.

When the music stops, someone will be left without a chair if players are not careful, and advisors don’t explain risks thoroughly.

What are potential benefits and consequences of athletes investing in nonfungible tokens?

A huge benefit for athletes regarding NFTs is that they can create their own using their brand. There’s no cost to them other than their time.

Athletes could even pay an expert or company to do all of the marketing labor as well as facilitate the sale of the NFTs. Individuals who are not professional athletes can also create NFTs, but they don’t have the brand to power the value of the NFTs.

Anyone can buy NFTs at a lower cost and sell them for a higher price, just like you can with stocks. However, athletes have the advantage of being able to create meaningful NFTs at virtually no cost.

Professional athletes also have a unique opportunity because athletes, by nature and through their notoriety, get access to exclusive opportunities that many other people don’t get access to.

They can form relationships with individuals who have NFT opportunities that are legitimate and a great investment. Although not all opportunities are good opportunities, so this can also be a disadvantage for athletes.

There can be millions of people approaching them with various opportunities and it can be hard to sort through all the noise. Athletes must be able to understand exactly what they’re buying and grasp the true value of a specific NFT. This is exactly when financial advisors’ opinions and guidance are critical.

Can you provide some insight into the ins and outs of athletes creating and selling their own NFTs?

There are a few different ways athletes could go about creating and selling their own NFTs. An athlete could just take some photos on their iPhone and create their NFTs on the spot, which has a very minimal cost, but they would have to monitor the NFTs themselves.

From a marketing standpoint, there’s not much firepower behind that route. The reality is if an athlete has a huge following, and they put the NFT opportunity on their social media channels, it will take on a life of its own. Their social media can act as a marketing channel that is just as powerful, if not more powerful, than some NFT platforms.

One of the most important aspects when creating an NFT is deciding whether you want to create your own and therefore handle the process yourself, or if you want to hire a third party to help you ensure everything goes smoothly while taking away some of the administrative tasks of the creation process.

One thing that athletes do need to keep in mind is that it is very possible to saturate the market quickly, which many players find out the hard way. Athletes need to walk that tightrope between making sure that the NFT is limited enough to continue to uphold value, and possibly having too many out there and saturating the market.

What is the most important financial planning advice you tell advisors working with professional athletes?

A financial advisor needs to be prepared to be just as much of a financial coach as they are an investment advisor.

It’s very hands-on with frequent overall life conversations because these athletes are usually young professionals and have so many different people around them saying different things.

It’s not simply saying, “do this” or “don’t do that.” Vague and traditional advice will not be good enough. You have to really be able to justify, reiterate and walk them through what you’re recommending over and over again. It’s never just a one-time conversation, and it shouldn’t be.

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Q&A: Financial Planning for Professional Athletes originally appeared on usnews.com

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