The Biggest Mistake To Avoid Before The Draft
The most harmful and inaccurate piece of advice that many players are told before the draft is, “you don’t need a financial advisor before the draft.”
This is equivalent to a scout telling you that you don’t need to hire a sports advisor.
As many of us know, there is a conflict of interest in that recommendation and often times it’s because the scout does not fully grasp the value a sports advisor provides to a player.
As an amateur player, you do not have the experience or expertise necessary to navigate the draft process and negotiate the best signing bonus. Based on your own knowledge of needing help you have hired not just any attorney, but a sports agency that has the exact expertise you need.
Considering the value of hiring the best sports advisors, doesn’t it make sense that players and their families would also hire the best financial advisors to help them make the biggest financial decision of their life?
However, every year, several draftees mistakenly disregard the need to seek guidance from a Certified Financial Planner professional before their draft decision is made. As a former player who has been through the process, I urge you to not make the same mistake.
Being a first round pick is more than just preparing for your signing bonus. It is preparing to manage a significant amount of wealth at a very young age.
The majority of 1st round players will make significant money during their careers:
95% $5 million career earnings
88% $10 million career earnings
62% $25 million career earnings
44% $50 million career earnings
22% $100 million career earnings
The two biggest misconceptions surrounding the need to choose a financial advisor before the draft are:
DOESN’T MY AGENT DO THAT?
According to the MLBPA Regulations Governing Player Agents a Player, if he so desires, may designate an agent to conduct on his behalf, or to assist him in, the negotiation of an individual salary and/or Special Covenants to be included in his Uniform Player’s Contract with any Club, provided such agent has been certified to the Clubs by the Association as authorized to act as a Player Agent for such purposes.
The primary role of an agent is to help secure the best contracts both on the field and off the field to compensate for the player’s talent.
A good rule of thumb to determine what a professional’s main role is to follow the money. How are they compensated?
An agent is paid a percentage based on the Gross (before tax) value of a player’s contract. This is a great motivator for your agent to negotiate the highest possible salary. Here, both of your interests are aligned, which is a win-win situation for both parties.
However, once the gross amount has been negotiated, a sports advisor’s vested financial interest disappears. What you choose to do with your money has no financial effect on your sports advisor. This is NOT a criticism against sports advisors, but rather an emphasis on the importance of hiring financial experts. Your sports advisor has specialized expertise and has accomplished their goal. A great baseball analogy is once the pitch is delivered, it’s out of the pitcher’s control what happens next.
As a player, your ultimate goal is not the Gross amount; rather, it is the net (after-tax) amount. This is why it is critical for a player to leverage the expertise of not only a sports advisor, but also a Certified Public Accountant (CPA®) and CFP®, all of which must specialize in working with professional athletes.
There are many factors that will determine the net amount of your signing bonus, which we will detail in depth in our future article, “Maximize Your Bonus.” Here, we highlight the importance of the timing of payment.
Timing of Payment
Bonus payments are typically split 50/50 and paid over 2 years. Accelerating or deferring the bonus into uneven payments can generally reduce the overall liability, depending on the circumstances. A common mistake is to always accelerate the total amount into the first year.
To turn this concept into something tangible, here is an example of the $115,800 net-tax savings created for a 2013 draftee. This player received a $4,500,000 signing bonus.
Scenario A – Common Approach: $2,597,100 net bonus
The most common approach that teams and sports advisor agree on is for the player to receive his signing bonus in two equal payments over two years. There will be no tax decisions made until the return is filed the following April. In this player’s situation, he would have received $2,250,000 in 2013 and then a second payment for $2,250,000 in 2014, resulting in net-compensation of $2,597,100.
Scenario B – Tax Planning Approach: $2,712,900 net bonus
Luckily, this draftee worked closely with our group and his sports advisor to structure the signing bonus in the most tax-efficient way. He realized a significant gain by combining an efficient payment structure of the bonus ($4,000,000 in 2013 and $500,000 in 2014) and three additional tax planning strategies resulting in total net compensation of $2,712,900. That is a net-tax savings of $115,800.
I DON’T HAVE ANY MONEY YET
This is a result of the common misconception that a financial advisor is synonymous with investing. While investing is an important piece of a financial plan, there is so much more to responsible financial management. Topics such as budgeting, tax planning, and insurance protection need to be discussed well before “investing.”
Bottom line, the questions that need to be answered before signing include:
How should my signing bonus be structured to minimize the taxes I will owe?
Where should I establish residency?
How do I establish residency?
What is my plan for the millions of dollars that will be deposited into my checking account within the next 6 months?
Who has experience working with athletes who earn millions before the age of 30?
Contact Us today to ensure you make the right financial decisions.
