As a potential 2017 MLB Draftee, you have the opportunity to earn a substantial amount of money. In 2016 there were 72 players who received signing bonuses at or above $1,000,000.
In an instant you will suddenly have more money than ever before, and despite being young and inexperienced, you will have to make decisions that will affect you and your family (present and future) for the rest of your lives.
Unfortunately, financial management is the area in which athletes suffer the most from unqualified advice. According to a study by Rothstein Kass 71.9% of athletes have been exploited by their advisors.
The two biggest contributing factors to this financial epidemic are when a sports agency attempts to double as a player’s financial advisor or when a sports agency recommends a financial advisor who is unqualified and where conflicts of interest may exist.
THE PROBLEM WITH ALL-IN-ONE AGENCIES
Is your agent offering to take care of your finances? It may seem like a logical fit to leave your finances in the hands of your agent. After all, you most likely trust him with all your “business” decisions.
However, we would caution you from making what we believe to be a huge mistake.
One of the main factors that has contributed to financial failure for many players is the evolution of one-stop-shops. Agencies attempting to be “all things” – contract negotiator, marketing expert, legal advisor, financial advisor, business manager, etc., to players.
Rarely can any one company or individual provide objective expertise across all of these areas. Each of these aspects of a player’s career is complex and requires specialized knowledge, expertise, and skill. In addition, the potential for conflicts of interest increases under these conditions.
Though there are many well-intentioned agents at firms suggesting that they “protect” their clients from these inherent conflicts, principles can easily get compromised when doing right by the client does not maximize their own compensation, or their employer’s profits.
The State of California feels so strongly about the importance of separation between talent representation and financial management in the entertainment industry that they enacted specific regulations.
California Labor Code and California Code of Regulations, Title 8:170040
…(b) no talent agency may refer an artist to any person, firm, or corporation in which the talent agency has a direct or indirect financial interest for other services to be rendered to the artist, including, but not limited to…business management, personal management…(c) no talent agency may accept any referral fee or similar compensation from any person, association, or corporation providing services of any type expressly set forth in subdivision (b) to an artist under contract with the talent agency.
HOW ABOUT THE GROUP MY AGENT RECOMMENDS?
This happens very often and can be a great place to start your research. However, this is also one of the main culprits of players hiring incompetent and unqualified financial advisors.
Unfortunately, there are agents who refer a financial advisor based on who they believe with help “protect” their relationship. Not who is the best qualified expert to help their clients achieve lifelong financial success. Most recently, a financial advisor who many well-known agents referred business too was indicted by the SEC for fraud.
If an agency is going to recommend a financial group, there are a few key questions you should ask the agency to answer in writing as to why they are recommending a group.
- Beyond working with the agent’s existing clients, what qualifies the financial group?
- Does the agency receive any compensation for referring their players to the financial advisor?
- Does the recommended financial group work with any players represented by different agencies? This would be a good sign that the financial group is considered an expert by multiple agencies and has no “allegiances” to any one agent.
It is important that your financial team has a professional working relationship with your agent to help ensure all contracts are negotiated in the most tax efficient way and align with your most important financial goals. At the same time, it is imperative that there is a clear separation between your financial team and your agency to maintain a fiduciary standard where there are no conflicts of interest. Regardless of where a recommendation comes from it is extremely important to make sure you are hiring qualified experts. Choosing the right people to take financial advice from will most likely have the greatest impact on whether you end up wealthy or broke.