Ensure You're Insured
Professional athletes are constantly concerned with managing the risk of injury. The majority of pro athletes (and even college athletes) take out insurance policies to protect them from losing future income due to serious injuries. ESPN The Magazine stated David Beckham took out a $78 million insurance policy on his legs, and Real Madrid insured superstar Cristiano Ronaldo’s lower-body for $153 million!
Clearly, the mass amount of future earnings is one of pro athletes’ biggest risks to be protected. Yet, athletes fail to protect a more immediate risk: money they’ve already earned being lost to fraud or other abusive financial practices like excessive fees or unsuitable investments.
Who Protects the Money an Athlete Has Earned?
Most people, not just athletes, presume their financial advisors and/or business managers are their risk managers. This presumption is true to a certain degree, but it depends on the competence of your advisor. Assuming they are acting in your best interests, the competent ones are managing investment risk, default risk on bills, the risk you may invest your money terribly on your own, and a ton of other types of risks.
The competent advisors should also be answering the following questions for you:
- What is my advisor’s regulatory and professional background?
- How is my advisor being paid?
- How much am I paying in fees and how are hidden fees eating into my returns?
- What are my investment objectives and risk tolerance?
- How are my investments in line with my investment objectives and risk tolerance?
- What is my asset allocation in stocks/bonds/alternatives?
- Will I be sold private funds sold by an affiliate of your investment firm? How are you compensated? How does your firm determine this is the best investment for me?
- Are my returns in line with the risks being taken?
- How much am I spending/saving per month?
- Etc., etc., etc.
The best advisors are great risk managers because they understand your particular wants and needs, set reasonable expectations, document their investment process and are fully transparent, invest accordingly while educating you on your progress towards those goals and expectations, and are ethical. As circumstances change, the advisor reacts accordingly. The best advisor is your financial babysitter and a warden of your money.
The bad to the worst advisors - from the immoral and unethical to the cheats and fraudsters - are, as you might have imagined, terrible risk managers. They’re more concerned with selling high-fee investments, charging excessive commissions when possible, skimming money from your accounts, complicating your finances so you cannot understand what’s going on, and painting rosy pictures that your money is in good hands.
How does an athlete know whether he has the best advisor or the bad advisor? In the latter case, they become aware too late when the money's gone.
If a Tree Falls in the Forest...
Imagine an athlete’s advisor was committing a fraud. Do you think the advisor would then answer any of the questions above honestly, if at all? Would he tell you that he’s defrauding you? If he won’t tell you then who will? And when? Or would you be able to identify it?
In a blog post I wrote months ago, Where Is the Data on Fraud with Professional Athletes?, I detailed a report from 2016 by the Association of Certified Fraud Examiners which reviewed over 2,400 cases of fraud. The report found 88% of fraudsters are first-time offenders and 94% of fraudsters took some effort to conceal their fraud. The report also estimated that fraud costs 5% of a company’s revenue each year. Their 2014 report had similar statistics as well.
Despite these statistics as well as the unending and well-documented cases of fraud in sports, there is still a lack of oversight of athlete’s finances which continually presents the opportunity for these frauds to occur.
Athletes trust their advisors as much as they trust their ability to stay physically fit. In both cases, there is a chance of being injured, physically or financially. Athletes manage the risk of physical injuries by buying insurance but fail to manage the risk of being defrauded. Of course, athletes should trust their advisors, just like they trust their ability to stay healthy, but there needs to be checks and balances on their financial management, just like there are checks and balances on their health via trainers, doctors, technology, and their own awareness of their bodies.
One of the main principles of risk management is to “explicitly address uncertainty.” When an athlete does not understand and/or monitor his investment and banking activity, he or she is failing to address a huge uncertainty, a risk that’s cost athletes millions of dollars.
In a follow up post, I’ll detail all of the principles of risk management and how they can be applied to manage the financial risks that pro athletes face.
Not Only Problems but Solutions
I’ve spoken to many people in the sports industry who agree there is a need for financial risk management by a third-party, a party who does not have a conflict of interest by managing the athletes’ money. My job at BrightLights is not only to detect and monitor fraud for pro athletes, BrightLights helps an athlete identify, understand, and implement risk management of his finances to maximize his chance of financial success while minimizing the chance of losses.
Contact BrightLights for a free risk assessment.