What are athletes doing to protect themselves?
As an increasing number of athletes continue to be victimized by financial fraud, many athletes are taking measures to protect themselves. Specifically, we are seeing the following risk-mitigation steps:
- Establishing a formal relationship with a properly accredited financial advisor. Designations such as certified public accountant and certified financial planner signify that an advisor likely has the baseline education necessary, including required ethics training, to perform the advisor role. Some players’ associations have attempted to go a step further, instituting programs to identify qualified financial advisors and mandate that agents only recommend those advisors who have been formally approved.
- Periodically reviewing financial information. As we’ve already established, active athletes likely don’t have the time consistently to review their own financial information. But even infrequent reviews are proving to be effective; recently, a $30 million Ponzi-like scheme and unauthorized use of cash by a financial advisor came to light when an athlete discovered deductions from his own account.
- Requiring regular disclosures and performance updates from representatives and reviewing that data. Athletes who are requiring their representatives to provide regular, detailed updates about their financial performance increase the paper trail, the formality of their arrangement and their personal knowledge of their own investments.
- Signing a formal contract with any representative. Like any ongoing business relationship, a signed contract detailing the terms, conditions and scope of services establishes the requirements for both parties.
- Including rights to audit in any formal arrangement. For athletes who use financial managers, including a right to audit in their contract has proven to be a useful tool for a variety of reasons. First, it can enhance the ability to detect and detail any wrongdoing. Second, it potentially can prevent that wrongdoing in the first place by acting as a deterrent. And third, it provides an extra layer of comfort that there is accountability in the business relationship. Audit rights should be part not only of a formal manager relationship, but of every major investment an athlete makes.
What can athletes do to prevent potential fraud?
First and foremost, athletes should hire reputable, vetted external parties rather than smaller-sized, inexperienced advisors to manage their finances. These parties should be recommended by objective, third-party sources. Some financial professionals will promote their ability to increase financial returns, but a good financial professional will be adept at both wealth accumulation and wealth preservation.
Before entering into any type of professional relationship, an athlete should consider a host of risk areas because individuals often will make many claims or provide credentials that may not be entirely truthful. A critical step an athlete can take to lower their risk is to conduct due diligence on their financial representatives or potential investments in advance. Due diligence may include:
- Background investigations
- Conflict-of-interest checks
- Analysis of relevant documents
- Audit or review of financial reports
- Reference checks
- Investment strategy (and history of success)
- Training and education
- Reputation among others in the industry and other professionals who have worked with them
In all cases, it is wise to use experienced, reputable, independent third parties to perform these due diligence steps.
What can athletes do to detect potential fraud?
As noted, the known number of athletes affected by financial fraud has continued to increase. For athletes who suspect but have not yet discovered fraud, there are a number of ways that fraud, waste, abuse or negligence potentially can be uncovered, including:
- Auditing financial records
- Conducting a formal fraud investigation
- Calculating and comparing royalty and licensing fees received with amounts required per contracts
- Assessing if actions of financial representatives comply with their contracts
- Extracting and analyzing emails and other electronic information for review
Sports is a unique business. Unlike other professions, athletes reach their earnings peak more quickly, and while their average career earnings are substantial, the average career length is not. As a result, issues of fraud often come to light once athletes are retired and the steady flow of income has decreased. Given the significant amount of money in sports, the unfortunate reality is that there may be fraud occurring that will continue to be undetected for the foreseeable future and, ultimately, contribute to the steady increase of athlete victims for many years to come. With diligence, regulation, increased monitoring and more responsibility shown by financial professionals, there is hope that these trends can be reversed.