Editors Note: In our November issue, we take an in-depth look at how athletes in the action sports industry can better manage their money and the often-occurring pitfalls encountered along the way. For the entire version of this story, pick up a copy of November now.
by Cullen Poythress
With action sports' meteoric growth, pro riders are locking in bigger contracts and heftier royalty checks than ever, and some contests now boast purses in the millions. That's a good thing right? Well, what happens when an athlete's career inevitably begins to slow, the seemingly inexhaustible flow of money begins to run dry, and the bills on the Aston Martin, vacation house in Hawaii, and Italian leather living room set begin to stack up? Statistically, pro athletes have an overwhelming tendency to end up completely broke.
In a 2009 Sports Illustrated article, “Why Athletes Go Broke,” Pablo Torre writes; "Professional athletes are very similar to lottery winners in that their money came very quickly with no real tie to any sort of financial prowess," says Torre. The result, he says, is an entire class of extremely wealthy people that have very little know how when it comes to managing cash.
The latest numbers suggest that more than half of professional sports players go broke within just a few years of their last game—a staggering figure considering many athletes leave their careers with millions in the bank, but with more at stake these days a number of new services are popping up to help athletes avoid this pitfall and put their wealth to work for a lifetime.
Conquering The Spend Cycle
In January, Skate Park of Tampa General Manager Ryan Clements and skate industry veteran Heath Brinkly joined forces to launch Exel—a money management business designed to help skateboarders and other action sports athletes manage their wealth. "Everyone that’s been around skateboarding knows a pro that was a big earner and now has nothing to show for it," says Clements.
Brinkly says sometimes money management solutions can be as simple as curbing the urge to spend. "These guys make useless purchases like high-end luxury cars that are worthless in a few years. We’re not saying don’t have a good time and enjoy the fruits of your labor—by all means live it up. But there’s a happy medium there somewhere."
Black Label Team Manager Dave Ashley has spent the last three years of his career managing some of the most successful skaters in the industry and witnessed the lures of spending. "I would say 90 percent of the skaters nowadays are in debt," he says. "They'll come up on some cash at a contest and end up blowing it all on booze, drugs, chicks, cars, trips to Vegas, and other random, useless, stuff. But it’s different now, there’s more at stake."
"Hey man! Remember me from middle school?"
For athletes who are able to ignore the lure of reckless spending, there are plenty of other financial pitfalls to be wary of. "The more money you have, the more people approach you to do things with that money," explains Clements, who says knowing how to spot bad deals and make smart choices when faced with loan or investment proposals can make or break an athlete's bank.
Bad deals often come from friends and family looking for angel capital to finance their dream business or other self-serving ends. "Some athletes engage in what they believe to be smart investing, but end up taking backwards deals they don't understand—sinking big bucks into high-risk, private equity ventures like nightclubs, restaurants, record labels, and clothing lines," says Ed Butowski, managing partner at Chapwood Financial, who has managed the personal finances of some of the highest net worth athletes in the world. Butowski says only one out of the 30 private equity investments in the world work out. "What are the chances that your cousin has this investment?" he asks.
Butowski has a strict litmus test for these types of investments; "You must own 70 to 80 percent of the investment until you get your money back, you must get a ten percent return per year until you get your money back, and the investment needs to return at least three times your money back in five years or you don't do the deal."
The Wrath Of The Tax Man
Tax evasion, voluntary or not, is another area of money management that's often problematic for action sports athletes. Many sponsored riders are hired as independent contractors working under a 1099. With no employee withholdings, taxes are something the athlete has to be personally accountable for and this often falls by the wayside.
"I can name a lot of skaters who I grew up with, and many of whom I've managed, that have had serious problems with back taxes," says Ashley. "It’s either because they didn’t pay taxes on time or they're spending money on stuff they can’t afford."
Planning For The Future
With most skaters' moneymaking careers only lasting between 10 and 15 years, saving and sound financial planning is critical to making earnings last. Clements, who manages Paul Rodriguez and Fred Gall's finances with Brinkly, says putting together a simple financial plan is the first step towards building a solid nest egg for the future. "We’ve found that most of the guys we talk to want to be responsible with their money. They just don’t know where to start."
For Butowski the financial roadmap to a prosperous future for athletes is pretty simple. "I don't care what industry you're in," he says. "If you compound your money and don't put it in convoluted private equity deals you won't go broke. You're never going to make as much money as you think and you can't forecast the future. If you learn how to compound your money, you will make a significant amount of money on return."