April 21, 2019

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Big league money, bigger problems

Pro athletes, or people with sudden wealth, have hidden hurdles to clear

Every parent has had the thought: one day their child might have a chance to be a pro athlete, with the accompanying wealthy lifestyle. (Sean Kilpatrick / The Canadian Press files)</p>

Every parent has had the thought: one day their child might have a chance to be a pro athlete, with the accompanying wealthy lifestyle. (Sean Kilpatrick / The Canadian Press files)

My boy’s (or girl’s) going to play in the big leagues.

It’s not just a line from a song. It’s a thought — albeit a fantastical one — often crossing the minds of parents watching their kids play sports.

Sure, it’s about as likely as winning the lottery. But it’s an intriguing day-dream all the same, particularly with regard to what they would do with vast sums they earn as compensation.

“There is a ‘fantasy’ aspect to the whole idea,” says Darren Coleman, a portfolio manager with Raymond James in Toronto, who manages pro athletes’ money as well as past lottery winners.

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My boy’s (or girl’s) going to play in the big leagues.

It’s not just a line from a song. It’s a thought — albeit a fantastical one — often crossing the minds of parents watching their kids play sports.

Sure, it’s about as likely as winning the lottery. But it’s an intriguing day-dream all the same, particularly with regard to what they would do with vast sums they earn as compensation.

"There is a ‘fantasy’ aspect to the whole idea," says Darren Coleman, a portfolio manager with Raymond James in Toronto, who manages pro athletes’ money as well as past lottery winners.

"I think every parent who has stood in a rink watching their kid play has had it run through their mind — whether it’s going to happen or not."

Yet there’s value for everyone in getting an understanding of how the sausage gets made when it comes to high-end money management, he adds, because a lot of Canadians could experience sudden wealth in their lifetime — from the sale of a business to receiving an inheritance.

Consider that CIBC forecast in 2016 that about $1 trillion will transfer from one generation to the next by 2026, meaning a fair number of folks are likely to receive significant sums of cash in the near future. These windfalls are unlikely to come close to a pro athlete’s annual salary. But learning the dos and don’ts of high-net-worth wealth management can be beneficial for the rest of us. Heck, even if they aren’t, the nuances of pro athlete money management are still fascinating and illuminating.

In large part, that’s because it’s not what we think.

"While it all looks really glamorous from the outside, it really is very complicated," says Dr. Moira Somers, a Winnipeg-based psychologist who works with individuals to resolve the thorny behavioural and emotional challenges that come with wealth.

Somers’ client base include a few pro athletes. And a few years back, she was invited to speak with advisers of NFL players during the lockout about how to manage their clients’ financial expectations when the cash spigot gets shut off.

She credits the players’ union, the National Football League Players Association, with being among the most progressive organizations regarding wealth management for its members among all pro sports organizations.

"Just as they’re leading the way in concussions, they are also leading the way trying to turn around the dismal statistics in how many athletes go broke within a few years of leaving the league," she says.

Given a 2009 Sports Illustrated investigative feature found about 80 per cent of NFL players were bankrupt or facing financial stress within two years of retirement, there’s plenty of work to be done.

Somers says the tendency of the public is to engage in "schadenfreude, where it’s, ‘Let’s all talk about the dumb jock who can’t manage his money.’"

But, she adds, this is "profoundly disrespectful and doesn’t capture the complexity of what these fellows experience."

For example, pro athletes must consider insurance none of us would ever think about — like coverage to pay ransom for kidnappings, or to deal with frivolous lawsuits. "They might check into a hotel, for instance... and a few weeks later, a bill arrives in their mailbox claiming they caused $40,000 damage to their hotel room," she says. "It’s a completely bogus claim, but they don’t have time to deal with that in the middle of season."

This is just one among many reasons why getting good advice is critical — particularly if you want to make your wealth last.

"So, while Uncle Kevin might be great with money... you really have to go to the people who are great at giving advice to people in these specific financial situations," Coleman says.

Rather than saving a lifetime to have enough money to retire, pro athletes receive a lifetime of income in a very short span of time.

And the goal is having that money last for decades, which "is extremely difficult when these individuals want to have a lifestyle that’s expected of them," Coleman says. "It’s a peer pressure thing: why are you driving around in a Honda Accord when the other guy has a Lamborghini?"

Furthermore, because their wealth is largely public knowledge, pro athletes are often approached by strangers, friends and family with investments — i.e. bankrolling a restaurant. While these investments are easier for them to understand than investing their money in portfolio of stocks and bonds, they generally involve a lot more risk.

"What we try to do is build them a solid portfolio that kind of looks like a pension plan," Coleman says. This involves low-risk strategies for the most part, like investing in blue chip stocks and high-quality bonds that generate steady returns over many years.

"We want their money to be able to produce an income to support their lifestyle when their sport is no longer able to produce an income for them," Coleman says.

As for those other investments, like restaurant ownership, "those are the high-risk private equity deals that we try to reduce as much as possible," he says. That doesn’t mean they can’t invest in these deals, but when they do decide to invest, it’s done in a measured way, exposing less of their wealth to the risk of a business going broke.

However, their challenges extend beyond budgeting for the here and now and investing for the future. These individuals also often have unique tax planning needs.

Taxes for professional athletes are "just ridiculously heavy in terms of the paperwork and compliance," says Elena Hanson, a certified professional accountant in Oakville with Hanson Crossborder Tax Inc.

The Ont.-based tax expert manages several NHL players’ tax affairs.

These individuals not only must file federal and provincial income tax in Canada. They often have to file with the IRS, and then separately with several states and even U.S. cities in which they play games or have duty days (i.e. practice).

"When it comes to individual tax-payers, you’re talking about one, maybe two, tax returns and that’s it," she says. "When it comes to athletes, sometimes we’re filing up to 54."

In most cases, no taxes are owed in the U.S. jurisdictions, but the state, municipal and federal tax systems south of the border are not integrated like ours. And if you fail to file in one of these jurisdictions, you’re presumed guilty until proven otherwise, she says.

The potential tax troubles simply further underscore the importance of seeking good advice amongst the many other voices competing for pro athletes’ attention — not all of which may have their best interests at heart, Somers says.

"They may look like men, but many of them are boys in many respects —18- and 19-year-olds — so it’s important they get surrounded by good, ethical, competent people from the start."

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