Less than a month after California Governor Gavin Newsom signed into law the Fair Pay to Play Act, the NCAA switched course and decided that it will allow student-athletes to receive compensation for their likeness, name, and image, signaling a major departure from its previous stance. Amateurism has long been a core tenet of the NCAA’s identity and bylaws, but in recent years, it has been challenged by some who feel the NCAA is taking advantage of these young players as schools make millions off of athletes who do not see a penny of that money.
When it comes to the big question – should student-athletes be compensated? – the simple answer appears to be yes. But the question that follows is far more complicated – what does this compensation look like?
Where’s the Playbook? (or A Game Without a Game Plan)
California may have forced the NCAA’s hand, but now there’s the issue of figuring out what all of this means for the athletes and schools, and the unintended consequences that may result. The NCAA made this announcement without defining what, specifically, this compensation would mean in practice. Nearly all of the details have yet to be worked out, with the NCAA leaving each division to come up with updates to their own rules by January 2021.
It’s hard to know yet exactly what this will look like for athletes, but the divisions within the NCAA will need to keep in mind the differences between higher revenue and lower revenue sports, the impact on Title IX, power schools versus mid-majors, and more. The dynamics of who gets money and the effect that has on recruiting could lead to further bifurcation of schools that are going after top talent. And, athletes need to make sure they’re not unduly influenced by following the money; the compensation should be an added benefit, rather than a distraction. The goal should still be to get a great education and to play the sport to the best of the athlete’s ability. And the term “compensation” itself needs to be clearly defined. Does this mean the athlete receives cash upfront? Or would it be put into a separate account – like a pension plan – to benefit the player later in life?
There are a lot of nuances to consider. Professional athletes already have specific financial needs that arise from things like longer retirements and uncertain career timelines. One of the greatest challenges in this industry is that these athletes are young and busy and don’t have as much financial expertise as others who’ve been able to learn over time. And now, this gets even more complicated as the professional athletes get younger and need help figuring out how to manage their finances at a young age.
Common Financial Fumbles
Once additional money—beyond scholarships, room and board, meals, rent stipend, etc.—is added into the mix, new complexities will surface. In our years of advising professional athletes, we’ve found two common mistakes that overshadow all others.
First, athletes don’t always have a clear understanding of their relationship with their financial advisor. The bar shouldn’t be “don’t get your money stolen.” Because these athletes are young and often lack the financial understanding that comes with building up wealth over a much longer period, they don’t always know what to look for when it comes to a financial advisor. Rather than merely looking for someone who won’t take advantage of them, they should make sure they have a deep understanding of their advisor’s experience, particularly when it comes to their ability to manage large sums of money. If an advisor is used to managing $300,000 portfolios and they suddenly have a client with $20,000,000, they may be inclined to work with what they know – they’re likely to allocate assets the same way they would for a much smaller portfolio, which may not be in the athlete’s best interest. It’s also crucial to understand how the advisor makes money. While compensating collegiate-level athletes may be new, compensation for financial professionals has been long established. Simply asking an advisor, “How are you compensated?” can reveal most of what an athlete needs to know. If the advisor answers with anything other than “fee only,” we think the athlete should keep searching.
The second major mistake is a lack of due diligence when it comes to private investments. Given their social status and entrepreneurial spirit, professional athletes are frequently presented with lots of private investment opportunities, from family members, teammates, etc. Given their lack of experience, however, in evaluating these kinds of opportunities, athletes aren’t always properly equipped to determine which deals will end up paying off down the road. At Verdence, we might evaluate 100 different companies before finding one that we believe is worth investing in. That’s the kind of due diligence we want our athletes to use as well – ensuring that their money will last despite a short earning period.
Find Your Team
Knowing the primary challenges these athletes face, the most valuable advice we can offer is this – spend a lot of time on the front end understanding who is giving you advice. Just like these athletes spent time figuring out which teams and coaches would be the best fit for their athletic careers, they should also put in the work to determine the ideal fit when it comes to who is coaching them financially. This relationship is key to getting the most out of their money, something that will continue to become more important as younger athletes start earning money before they’ve learned what to do with their finances.
We encourage our athlete clients to think like business owners. And that’s how we treat them. Our practice has a clear focus on educating athletes, empowering them to make the best decisions, and offering unconflicted solutions for how to grow their wealth.
If you’re going to use a financial advisor, it’s crucial to ensure you have complete confidence in whomever you’re entrusting with your finances. And, if you choose to forgo the financial advisory path, you’ll have to put in the time upfront yourself when it comes to researching investments and where to put your money. Of course, we’re biased, but we think that rather than going it alone, it’s better to be part of a winning team. Finding the right team is especially important for younger athletes who will now be exposed even earlier to both the financial benefits and challenges of being compensated for their athletic ability.