In this three-part series, I discussed how a current situation in the NHL demonstrated a larger issue many professional athletes face and introduced three common challenges when it comes to financial security: lack of education, advice and protection. Part I focused on lack of ownership, part II focused on the lack of qualified advice and part III will focus on the lack of protection.
Lack of Protection: What You Need to Ask
One of the most crucial components for a professional athlete trying to avoid financial distress or bankruptcy is being appropriately protected. As a target because of their incredible wealth and earning potential, professional athletes are often taken advantage of due to an overall lack of protection when it comes to their business and financial opportunities.
There are numerous stories of professional athletes filing for bankruptcy because they authorized representation of their financial affairs be given to someone else. Or other stories of athletes allowing family members to make business decisions on their behalf without the athlete being engaged in the process. These situations can lead to financial ruin, all due to a lack of protection.
All athletes need to ask "how am I being protected?" Considering professional athletes make a large salary over a very short period of time, their tolerance for assuming risk must be managed. For example, if someone working in corporate America makes a six-figure salary over 40 years, they can take on more risk and in return, manage tough economic times better than a professional athlete who makes a seven-figure salary but in only a few short years.
This risk dynamic should demand a focus on how well an athlete is being protected. Every person who is presenting a business opportunity or investment strategy to a professional athlete should be required to answer the question "how is the athlete I represent being protected?" This protection can be achieved by various methods that depend upon the specific opportunity, but some examples include:
- Ensuring there is liquidity in an investment strategy
- Not allowing an athlete to serve as the guarantor on multiple real estate projects
- Limiting a power of attorney to a specific transaction rather than allowing an unlimited power of attorney
A professional athlete must be able to understand how, specifically, he/she is being protected in every deal. There are certain questions to help an athlete understand if, and how, they are being protected in any type of transaction. Some of these questions include:
- What is the risk that I am bearing?
- If this transaction fails, what is my financial obligation?
- What rights am I retaining or giving up by entering in this agreement?
If qualified advisers and individual professional athletes stop to ask the simple question of "how am I being protected," and ensure that the response is satisfactory, then athletes will be empowered to make decisions that can prevent financial ruin.
Taking the necessary steps, such as those mentioned in part I and part II, along with asking the appropriate questions to determine "how is the athlete being protected," will help minimize the potential for financial distress that many athletes face in their careers.