Who Is Qualified To Be An Athlete's Financial Advisor
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The problem you face as a professional athlete is not the lack of people willing to extend a helping hand but the number of unqualified advisors soliciting your business. Thanks to the widespread flow of information on the internet it seems that everyone is now a financial guru. The biggest risk that you face is listening to bad financial advice from unqualified people.
There are more than 308,000 financial advisors in the United States, but very few are qualified to meet your needs.
Make no mistake about it, the difference between choosing the right financial team versus settling for any advisor can be catastrophic.
DO YOU WORK WITH CLIENTS LIKE ME?
One of the common mistakes professional athletes make when they build out their team of advisors is to assume that any financial advisor is qualified to work with them. One size does not fit all.
Take a look at who is the “traditional” client in the financial industry.
63 average client age
$425,944 average account size
Retirement planning is primary service
221 clients per financial advisor
Does this resemble you?
Ideally, you want an advisor who has extensive experience working with people just like you. Most financial advisors may be able to construct an investment portfolio, but not many of them specialize in working with 18 to 35-year old individuals with sudden wealth, uneven cash flow, uncertain job security, lack of financial expertise, and who are targets of lawsuits, investment scams, and the other complexities that come along with being a professional athlete.
As a professional athlete you have unique needs that the traditional financial advisor is not qualified to meet.
When interviewing a potential financial team the first set of questions to ask are:
What is the median age of your clients?
How many clients do you work with who are professional athletes?
Do you work with any clients with a net worth greater than $10 million?
ARE YOU AN EXPERT?
One of the key components for giving great advice is your advisor understanding the decisions you will face. This allows the advisor to anticipate the critical decisions you will make, and to communicate the information you need in terms that you can understand. With that said, solely being a former professional athlete does NOT qualify an advisor as a FINANCIAL expert.
Finding qualified advisors is particularly challenging because the financial industry selects, trains, and retains based on sales ability, not expertise. Accordingly, to the untrained and inexperienced eye, it is difficult to distinguish the qualified expert from one who is simply a good salesman.
THE MOST IMPORTANT QUESTION
The most important question we must ask a person who is soliciting our business is are you a qualified expert in the given field?
Becoming a financial professional is relatively easy. To become a financial advisor you must only pass a few relatively easy exams (Series 65 or combination of the Series 6 or Series 7 & Series 66 license). However, these exams DO NOT test the depth and breadth of an individual’s financial expertise. This licensing is similar to taking the ACT or SAT. It’s required to attend college, but doesn’t prove you are an expert in all subjects.
In short, the term “financial advisor” means very little.
The truth is that anyone can call himself a financial planner or financial advisor or financial counselor. This is where the importance of advanced credentials come in. If advisors do not hold any designations, in addition to investment licenses, understand that they have not demonstrated completion of any advanced education or expertise. You are settling for less than the best.
In our professional opinion, your primary advisor should be a Certified Financial Planner (CFP®) professional.
CERTIFIED FINANCIAL PLANNER (CFP®)
The Certified Financial Planner™ (CFP®) designation is the most recognized personal financial planning designation in the world.
Working with a CFP® professional is assurance that he or she is a credentialed expert and performs to high ethical and professional standards. The designation comes with extensive training in financial planning, estate planning, insurance, investments, taxes, employee benefits, and retirement planning, as well as in CFP Board’s Standards of Professional Conduct, which are rigorously enforced.
What It Takes To Become A CFP®
Education: The first step to CFP® certification is to acquire the knowledge required to deliver professional, competent and ethical financial planning services to clients. CFP Board’s coursework component requires the completion of a college-level program of study in personal financial planning and that every advisor has earned a bachelor’s degree (or higher) from a regionally-accredited college or university. In addition. An advisor must complete 30 hours of continuing education (CE) accepted by CFP Board every two years.
Examination: The CFP® Certification Examination is a 2 day 10 hour exam that assesses an advisor’s ability to apply their financial planning knowledge, in an integrated format, to financial planning situations. Combined with the education, experience, and ethics requirements, it assures the public that an advisor has met a level of competency appropriate for professional practice.
Experience: Because CFP® certification indicates to the public an advisor’s ability to provide financial planning without supervision, CFP Board requires an advisor to have 6,000 hours of experience.
Ethics: Most importantly, the CFP Board’s Standards of Professional Conduct require CFP® professionals to maintain a Fiduciary Standard, which means they are required to look out for your interests above their own. CFP Board conducts a detailed background check for all candidates, including review of an advisor’s involvement in any criminal, civil, governmental, or self-regulatory agency proceeding or inquiry, bankruptcy, customer complaint, filing, termination/internal reviews conducted by an employer or firm.
There are 75,467 CFP® professionals in the U.S. so there is no reason to risk your financial future by hiring an unqualified advisor. Caveat emptor.
YOU NEED A TEAM
Another common mistake we see is hiring a single “financial advisor,” often from one of the large investment brokerage firms. What most of these advisors do not disclose is that you are not hiring the brain power and resources of the firm. These firms operate much like real estate firms. You have thousands of advisors working for the same company, but all are independent of each other. Instead of benefiting from the collective expertise of a team, you are receiving advice from one individual.
In addition to your lead advisor being a CFP® the financial team should consist of a, Certified Public Accountant (CPA), and Chartered Financial Analyst (CFA®).
Certified Public Accountant (CPA)
Beyond investment management expertise, the second and considerably the most important area of expertise is tax planning. Unfortunately, many financial advisor do not also offer tax advice. In our opinion, this is the most costly mistake a player can make.
As a professional athlete, you will be in the highest federal tax bracket (39.6%) for the majority of your career. However, only 5% of the population earns enough to be subject to the highest marginal federal income tax bracket.
Multi-State Taxation
In addition, while the average individual only pays taxes in their resident state, you as an athlete file taxes not only in your home state but also in every state—and some cities—in which you play.
In other words, average individuals pay a small percentage of their income to taxes. Due to the lower tax rates and the sources of income described next, income tax planning is not a significant concern for the average individual.
Sources of Income
Another tax consideration to take into account are the different sources of income you as an athlete receive. As an athlete, in addition to your W-2 wages from your team you have the ability to earn off-the-field income that is considered 1099 miscellaneous income. Taxes are not automatically withheld which provides opportunities to utilized advanced tax planning strategies.
Investment Strategies
The third major difference is the impact your tax situation will have on your investment returns. As stated above, only 5% of individuals are subject to the highest tax rates. Therefore, the majority of investment options and strategies do not consider taxes. As an affluent athlete, after-tax returns are the only returns that matter for taxable accounts because dividend and realized capital gains distributions are subject to state, local, and federal taxation. Yet most individual investors remain focused on pre-tax results. Ignoring the impact of taxes on your investment returns is one of the biggest mistakes you can make.
What About Checks & Balances?
A common rebuttal to why an advisor does not offer tax advice is checks and balances. We believe 100% in having checks and balances but do not believe that having an independent accountant actually accomplishes this goal. There is a difference between tax preparation and financial auditing. These are two different services and very rarely offered by the same type of accountant.
What we are recommending is the importance of your financial team including at a minimum a Certified Public Accountant (CPA) who specializes in tax planning for professional athletes. This will ensure that every financial decision you make is looked at through the lens of maximizing your tax savings.
What is the probability that an independent accountant will be proactive on a regular basis to call all their client’s financial advisors to make sure every decision is also the best tax decision?
Does Your CPA Specialize In Working With Athletes?
Similar to financial advisors there are hundreds of thousands of individuals who prepare taxes. However, there are very few experts. Taxes are one of the most complex factors of an athlete’s career. Hiring a licensed Certified Public Accountant (CPA) with specialized expertise in multi-state taxation will be a key to your success.
This is another area where we see players make bad decisions. Due to the fact that nearly everyone is required to file taxes almost everyone works with a CPA. A common mistake is assuming that all CPA’s have the expertise to help athletes. Returning to the doctor analogy, you would never let any doctor perform your tommy john surgery. Rather, you would hire the best orthopedic surgeon.
The Federal tax code is 74,608 pages long and constantly changing. It’s in your best interest to hire a CPA who focuses all of their efforts in knowing how it effects you as an athlete.
If your team does not have a qualified CPA on staff, it is our belief that significant tax savings will be missed.
Chartered Financial Analyst (CFA®)
When it comes to managing your investments, you want the best, and the CFA® charter is recognized as the most elite designation for investment professionals. The Economist magazine has called the CFA credential the “gold standard” of the investment industry.
To become a charter holder, a candidate must have four years of qualified work experience and complete the CFA Program (mastery of the current CFA curriculum and passing three six-hour examinations), which takes on average four years to complete.
If an advisor and advisory team do not hold these advanced designations they have not demonstrated that they have the expertise necessary to advise you across all aspects of your wealth.
IS YOUR COMPANY INDEPENDENT?
Independent Registered Investment Advisors (RIAs) are professional independent advisory firms that provide personalized financial advice to their clients. Because these advisors are independent, they are not tied to any particular insurance products or investment products. As fiduciaries, they are held to the highest standard of care – and are required to act in the best interests of their clients at all times.
If you hire someone who works for an insurance company (Mass Mutual, Prudential, i.e.) or brokerage firm (Morgan Stanley, Merrill Lynch, i.e.) they are “registered representatives” and may have an incentive to sell propriety products.
This does not mean an advisor lacks integrity or is ill willed. It just means that there is a conflict of interest. I can personally attest to this as former Morgan Stanley advisors which was one of the main drivers for us choosing to leave and join an independent firm. There is great comfort that comes in knowing your advisor is putting your interests ahead of his interests and there is no incentive to sell you products.
