From On Wall Street Magazine | November 2006 Issue http://www.onwallstreet.com/article.cfm?articleid=3444

Douglas Raetz recently found himself flying from Los Angeles to New York to explain to his client—a 21-year-old professional basketball player—why buying a Maybach, a $400,000 luxury car that's the latest hot toy for the jetset, was a bad move. Even though the player was wealthy, the purchase would put him too far behind on his retirement goals.

In an average week, Raetz and his business partner, Heather Goodman—both Smith Barney advisors—field calls from nearly every one of their first-year clients: high-flying young athletes with multimillion-dollar salaries, lucrative endorsement deals and complex planning needs.

As part of their duties, Raetz and Goodman, who are based in San Francisco, plot out client retirement paths and monitor portfolios on a daily basis. But they also offer counsel on basic decisions, such as whether to buy an extravagant piece of jewelry or an expensive new home.

Their clients aren't ordinary, white-collar whiz kids with 30-year careers ahead of them. They're professional athletes. And despite their jaw-dropping salaries and endorsement deals, their careers are usually quite short. As a result, each financial decision matters. The fact that most of these clients haven't had any prior financial education only increases the challenge.

As Wilson Hoyle, who specializes in serving football players for Raleigh, N.C.-based CAPTRUST Financial Advisors, puts it: "You can't learn to shave on their face."

For all of those reasons, financial advisors working with professional athletes have to acquire different skills and offer much more personalized service than colleagues who deal with ordinary clients. They must be teachers and financial mentors, as well as advisors.

Despite the greater handholding challenges, make no mistake: Professional athletes don't pay higher fees than other high-net-worth clients. The industry norm of 1% of invested assets is what Hoyle's group charges. Nevertheless, the fees for serving such high-net-worth clients can still be lucrative.

Raetz, whose practice with Goodman used to consist largely of corporate executives, sums up the feelings of several advisors who focus on pro athletes: "What we do for our clients is a lot more life management, as well as wealth management—as opposed to working with clients who had the education and knowledge to manage their wealth, but had no time to do it. With a corporate executive, you might talk to them five, six times a year or maybe once a month. We talk to our clients every single day. Our clients come from disadvantaged backgrounds, and overnight they become millionaires. It's a lot to manage."

YOUTH MUST BE SERVED

Many of Goodman and Raetz's clients are young—cracking into the top ranks of basketball at the tender ages of 18, 19 and 20. And the majority have come from poor neighborhoods, where they received little (if any) financial education.

"They go from having little financial education and no money, to $5 million a year," says Raetz. "And then there are the high-profile lives, and everything is fast moving, and everyone is spending a lot of money around them." Indeed, many of these athletes are immediately whisked from tough circumstances in high school or college, to a world where lavish spending—on cars, clothes, property and the all-important "bling"—are the norm. And they have only a few years to earn enough to live on for the rest of their lives.

Financial advisors who specialize in working with athletes generally sit down with these newly prosperous individuals and teach them subjects, ranging from how to make personal spending decisions, to which business ventures to invest in.

THE SHORT AND NARROW

Adding to the challenge is the fact that advisors have little time to educate these clients. Although many athletes earn enormous salaries, for most of them there's only a narrow window of time to make all the money they'll need to support themselves and their families.

Hoyle—whose client list includes 2005 first-round draft picks Mark Clayton, a wide receiver with the Baltimore Ravens; Thomas Davis, an outside linebacker with the Carolina Panthers; David Pollack, a linebacker with the Cincinnati Bengals; Derrick Johnson, a linebacker with the Kansas City Chiefs; Chris Spence, a center with the Seattle Seahawks; and Roddy White, a wide receiver with the Atlanta Falcons—notes that the average career in the National Football League is 3.2 years. "If I make an investing mistake, I have years to recover," he says. "If they make a mistake, it's fatal financially. Based on the average career, they're out of college at 22 and retiring at 26. They have a lot of life ahead of them."

And a lot of errors are made—primarily by athletes who aren't financially savvy and are getting bad advice. Some have no one offering them advice at all. Goodman quotes the oft-cited statistic that 70% of athletes end up broke at the end of their careers.

Hoyle adds that even professional advisors with little athlete experience make a common mistake: treating these clients like other investors that have a long term time horizon. "To label them as growth investors would be foolish. Unlike the 62-year-old—who needs the money for the next 20 years—the player needs it for the next 60 years."

Raetz estimates that only the top 5% of professional athletes can keep earning money after their playing careers are over. Even those who continue to make money from endorsements and appearances earn far less than what they did during their playing days. He estimates the average post-retirement salary for that small percentage is between $500,000 to $1 million. Not bad, but not much, since an active player can earn upwards of $10 million.

In addition, these clients need help avoiding unscrupulous agents, advisors, acquaintances and even family-"all the long-lost cousins," as Hoyle puts it. Plus, all of this has to be done on the erratic schedule of a pro athlete. Hoyle notes that during the season, a football player works from 7:00 a.m. to 6:00 p.m. "After dinner is when he wants to go through his to-do' list," Hoyle says. "You're going to be on the phone in the evenings." The job of a pro athlete's advisor is 24 hours per day, seven days a week.

HANDLE WITH CARE

Most financial advisors for pro athletes project the cash flow for the life of a client's new contract. They plot it out on a month-by-month basis, so there are no surprises. They also account for expenses like taxes. "We break it into an actual paycheck for them, and they're like, 'Oh, that's not as much as I thought,' " says Goodman.

Then these advisors divide the money into different pots. Raetz and Goodman create three accounts for a player. The first is a personal allowance account, which is purely spending money for fun items, such as clothes and cars.

The second is a bill-paying account for all of the client's regular expenses—including mortgage and utilities. These expenses are set up to be paid automatically so the client doesn't have to worry about bills not getting paid on time while he's on the road.

The rest of the money flows into a savings account. The investments are designed around that. "We know how much they should have at the end of the contract," Raetz says, "and if we see one month they spent $10,000 more than they should have, their investment column will be reduced by that amount."

Raetz says that the big difference between these investors and his former CEO clients is that preservation of income is essential. "Their career span is so short that we know we have to save as much of that money as possible and create, from fixed income investments, a salary for them for life," he says.

But even after much education on the importance of saving, clients still want to spend. Although individual personalities are different, a good rule of thumb is that the younger the client, the more he wants to spend. "There is so much pressure on the clients to live this certain lifestyle of celebrity," laments Raetz.

It's a lot for a young athlete to take in-hence the frequent phone calls asking about the affordability of certain items. But Goodman rates those calls as a sign that their teachings are taking hold. "The first year is always the hardest, the most monitoring. They're always calling and asking: 'Can we spend this? What's my balance?' By the end of year two, they never ask because they're so disciplined."

A lot of the advisor's job in the early years with a client is day-to-day cash management. Goodman and Raetz are more banking-oriented than many of their peers and work closely with Smith Barney's debit-card system. "We're on the phone with them daily or multiple times a day," says Goodman. "We know all of the New York operations people."

They do a lot of wire transfers for clients—whether the money is going to family members or into large purchases. They also get available balances and secure extra emergency cash.

"These things are over and above the normal client service level," Goodman admits. "But these guys are not going to walk into a Citi branch on a Saturday morning. They're well-known, and they get enough publicity and people following them. We try to make it as easy on them as possible, so they don't have to do the typical tasks an average person does."

FIXING THE HOLES

A key component of the job can sometimes be cleaning up bad credit. While not all clients need this service, many do to some extent.

Michael Daly, a branch manager at American Home Mortgage in Kansas City, Mo., works with the NFL to educate athletes about credit. Daly estimates that new NFL recruits have credit problems 70% of the time. Still, the problems are primarily not the fault of the athlete, but the university where he played.

Athletes aren't permitted to hold jobs during college and depend on the school to pay their medical expenses. Often, the athletic departments' back offices are not up to the challenge of keeping every athlete's paperwork up to date. The result is that players end up with medical collections against them. "Lots of these kids come into the pros damaged by the universities who are using them in a recruiting manner, and they're not taking care of them," says Daly. "They see their credit report and say, 'Man, I thought the university was taking care of that.' "

Other credit problems with young recruits are as simple as not having enough credit. Many have only had cell phone bills in their names. With so little history, one missed payment is enough to damage a credit rating.

This is a problem, because the first thing many athletes want to do with their money is to buy a house for their parents. Then comes a house for themselves. But based on their credit scores alone, many young phenoms aren't able to get decent terms. Several advisors cite cases where a young star with a hefty contract received quoted rates of 10% to 12% on his mortgage.

Many specialist advisors end up working closely with a financial institution's lending officers to educate them about the almost unique situation of professional athletes. Although they have no credit, they have a contract worth millions, and so they can be relied upon to make their mortgage payments. "We set up mortgages on automatic payments so the lender is comfortable," Raetz says. "We have 60 loans on the books with Citi, and we've never had a late payment. Even with a 500 credit score, they're able to get rates of somebody with $1 million in the bank and a stable lifestyle."

Yet even after straightening out a young player's credit and teaching him how to budget and manage his daily cash needs, an advisor's job isn't over. As with traditional advisors, there's the need to help the client sort through family issues.

Many advisors say that inquiring about who is important in the client's life is one of the first questions they ask. Fortunately, many report that the days of 15- to 20-person entourages are over. But the average client still supports two to five other people—such as parents and siblings. "We tell them to let us be the 'bad cop' and say 'no' to or monitor the spending of some of the relatives," Goodman says.

The way she and Raetz handle the delicate issue is to give each family member a certain amount of money over a specific period of time, instead of a large lump sum. "Once that's done, they're going to come back for more," Goodman says.

In a few cases with superstar clients with big families, it simply requires more organization on the part of the advisor. Raetz and Goodman have a client who recently signed a contract extension worth $80 million. It's a hefty sum, but there are 17 advisors working with the athlete and 15 family members involved in his wealth. Raetz and Goodman had to organize a meeting of 30 people to discuss the strategy for everything; from estate planning, to taxes, to what kind of car to buy.

Even after all of this, an advisor's work isn't done. Veterans frequently need help, too.

AGE BEFORE WISDOM

Tom Drees, a Merrill Lynch advisor in Minneapolis, works with professional athletes—most of whom are baseball players. His experiences with new clients are different from Raetz's, Goodman's and Hoyle's. That's because by the time most baseball players break into the major leagues, they're several years older than their counterparts in basketball or football. There are no 18- to 19-year-olds in Major League Baseball, and only a few 21-year-olds come up each year. (Compare that to the couple of dozen per year in the National Basketball Association and the NFL.)

Another factor in the mix is the minor leagues, which generally pay a relative pittance in salary. "After three, four years in the minor leagues, you get humbled and grounded," Drees says. "And on average, you get a different perspective from guys who sign young with the NBA and get $30 million dumped on them."

So although a client's extreme youth isn't as big of a problem for Drees, he too, has to educate his clients. And he wants to make sure they not only understand where their money is going, but also how to manage it themselves when their playing days are over.

Drees cites a common arrangement where a business advisor will take 3% of player's income per year for simply paying the bills and doing his taxes. For a player with an income of $5 million, that's a hefty $150,000. Another wrinkle in Drees' practice is that it takes his clients a longer time to get to the big time. Along the way, they often receive inappropriate advice from advisors who don't understand the financial path of a pro baseball player.

Many players will sign contracts out of high school or college to go into the minors for small bonuses. Often, advisors will invest the money for the long term, leaving the player nothing to live on in the short term. These clients may be making $800 per month for four months out of the year. "It's not advantageous for a person who won't be in a high tax bracket for the next five years to be invested like that," says Drees.

Some advisors who handle sports stars are empathetic because they used to be athletes themselves. For example, Drees had played baseball for the Chicago White Sox and other teams in the minors between 1985 and 1993. As he got older and saw fewer opportunities as a player, he ratcheted up his off-season involvement in finance. He worked at KPMG and then Merrill during the offseason—first learning accounting and helping teammates with their taxes, then moving to help them open cash accounts at Merrill. Now about 80% of his practice comprises 75 baseball professionals: 45 active major leaguers, 20 retired ones and 10 front-office personnel. Their account sizes vary, but his top 50 clients average about $4 million.

The locker room is a world that doesn't let outsiders in easily. Hoyle notes that many advisors are lured to the specialty by big clients wash out. It takes time to build clients and a network, he says. "And you have to be patient with the clients, because they are high-maintenance. They are going to take up your time. But it's a finite world, and there are only so many athletes. That's a good thing."

(For a PDF file of a chart showing the differences in salaries among pro athletes in baseball, football, basketball and hockey, click here.)

Getting With the Program

Professional athletes need even more financial advice than ordinary people do because they have shorter careers in which to earn their retirement savings. And the risk of encountering a financial pitfall is relatively high for these clients. Case in point: At least 78 players in the National Football League were defrauded out of more than $42 million from 1999-2002, according to the NFL Players Association.

So in 2002, at the players' behest, the NFLPA set up the Financial Advisors Program to create a stable of reliable professionals from which players could choose. These days, the program has about 500 advisors—including insurance agents, estate planners and CPAs.

To register, advisors must have a college degree, insurance and at least three years' experience in some form of financial services. They must also conform to a code of conduct.

According to Dana Hammonds, director of the initiative, more than 1,000 active players in the NFL use this program, which has been "incredibly successful in reducing incidents of fraud." One of her goals is to boost the number of women participants. Only 15 to 20 of the program's advisors are female. Hammonds adds that players often ask to work with female advisors—but whether that's because these professionals are perceived as being more honest or patient than men, Hammonds couldn't say.