Athletes spend too much and have little liquidity
Professional athletes make millions thanks in part to their competitive natures. Many end up losing those millions — thanks to the same competitive natures.
“They think that maybe somehow they can will their investments to work,” says Ed Butowsky, managing partner of Chapwood Capital Investment Management in Dallas. “And it doesn’t work that way.”
Warren Sapp is the latest prominent former athlete to file for bankruptcy. Butowsky calls that “sad, but not surprising.”
Sapp, who played defensive tackle for the Tampa Bay Buccaneers and Oakland Raiders in a 13-year NFL career, owes roughly $6.7 million to creditors plus back child support and alimony against assets of $6.45 million, according to a Chapter 7 bankruptcy filing in Fort Lauderdale, Fla.
Other former athletes who have run into financial difficulty of late include Allen Iverson, Arantxa Sanchez Vicario and Lenny Dykstra.
“These people are going broke for three reasons,” Butowsky says. “I’ll make it real simple: One, they put too much money in private equity investments. Two, they put too much money in real estate. And three, they spend too much.”
Butowsky offers this rule of thumb for athletes: “They should have 70 per cent to 80 per cent of their money — or 80 per cent to 90 per cent, depending on who they are — in public securities, things they can get into, and out of, very easily. They should not have any private equity investments or real estate investments until they have at least $3 million put away after taxes.”
Butowsky says blame in these cases falls on financial advisers who give bad advice as well as athletes who spend outlandishly: “I don’t think the economy plays a role in this. Stupidity plays a role in this.”
Chapwood Capital will soon offer athletes an online financial-distress calculator. Some categories under expenses offer a hint of why things go wrong: Monthly money to friends and family, child support, agent’s salary, discretionary spending.
Butowsky says he knows none of the particulars in Sapp’s case, “but I can almost guarantee you he put too much money in illiquid investments. ... It’s a lack of liquidity that’s killing these guys.”