Financial fraud as a contributing factor to athletes’ loss of wealth
INSIGHT ARTICLE |
Top-earning professional athletes can make millions of dollars over their careers, but a combination of short playing careers, excessive spending and financial fraud can combine to deplete or even erase those earnings.
Numerous media reports have, over time, covered the topic of professional athletes losing significant amounts of money or even going broke, often with the focus on the sensational aspects of lavish lifestyles, exorbitant spending or bad business decisions. But while the impact of financial fraud on athletes’ loss of wealth has seemingly been less of a focus, the research and information on this issue are clear: financial fraud is a significant issue at it relates to athletes and their loss of wealth.
Financial fraud can be devastating, not only from the obvious financial perspective, but also from a psychological perspective. Being a fraud victim can cause tremendous stress to the victim and their family, create a lack of trust in others, cause feelings of betrayal and guilt, and may also cause someone to doubt their own judgment.
While fraud schemes that impact professional athletes are typically of the same type as the ones that impact the general public, there are some unique aspects of their situation that can make professional athletes even greater targets, or possibly even increase their vulnerability to fraud. For example, top-earning professional athletes may obtain significant levels of wealth very quickly and at a relatively young age, which in addition to other factors may contribute to them being a target.
Also, due to their competitive mindset, athletes may be overly aggressive with their finances, or have an overreliance on friends and family for business or investing advice, possibly placing them at greater risk of becoming victimized. In fact, fraud perpetrators may intentionally target professional athletes, knowing their competitive drive and potential willingness to take risks.
Furthermore, athletes tend to focus on improving their abilities to extend their playing careers as long as possible, crowding out thoughts of failure or when their careers might come to an end. While this may serve their athletic careers, it can create a lack of focus on their current financial situation and even work to hinder financial preparations for when playing days come to an end.
Whether professional athletes become victims of fraud through theft, embezzlement, investment fraud or other schemes, steps can be taken to potentially reduce the likelihood of becoming a victim, or lessen the effects of financial fraud.
Top earning athletes may have income levels approaching those of middle market companies. Developing more of a business mindset for managing income and wealth is likely a prudent starting point for athletes and their advisors, and could lessen the likelihood of becoming the victim of financial fraud. An effective approach would likely include developing an overall business plan, conducting proper due diligence on business partners and opportunities, as well as ensuring adequate and regular reporting on investments.
As a starting point, athletes may want to ask a series of questions and gather more information as part of a due diligence process prior to making business or financial investments. Some examples of the types of topics and questions that could provide useful information are shown below.
For business investments:
- What is the goal of the investment?
- Is there a business plan and experienced management team in place?
- What is the investment time horizon and exit strategy?
- Will the athlete receive accurate and timely financial reporting?
For financial investments:
- What are the credentials of the advisor?
- Has the person or firm been the subject of regulatory actions?
- Has the athlete read through, and do they understand, the information regarding the investment?
- Does the athlete really understand the investment, the investment time horizon, risks, and a potential rate of return?
In addition to the aforementioned items, FINRA has published information and resources to help individuals make more informed investment decisions through its Investor Education Foundation and Save and Invest program. This guidance provides information for investors to be aware as they consider making investments, and warning signs of potential fraudulent behavior.
Download our white paper to better understand how and why athletes may be susceptible to fraud, and gain insights into steps that can be taken to possibly prevent becoming the victim of financial fraud.