Why Focusing on Investment Returns Isn’t Enough | NFL Players' Podcast | Zach Miller & Erik Averill
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Episode Summary
We’ve all seen the headlines of former professional athletes - who made millions in their career – having to file bankruptcy later in life. It’s a sad statistic and one that should be totally avoidable when you have a competent financial team that has your best interests in mind.
The problem can come when you hear many different financial advisors who tout their ability to get you the best returns on your investments. However, investment returns aren't enough, and this can often be a sign that your advisor is focused on the wrong objectives. They are ignoring so many other aspects of your finances.
In last week’s episode, we discussed the reality that, as an athlete, you’ve committed your life to being the absolute best at what you do, and that you should also demand the best from your professional team off the field. This week, we continue by talking about identifying and leveraging the greatest drivers of your net worth – your human capital, what to look out for when building your ideal financial team, and what it actually means to own your wealth.
Episode Highlights
What should players be trying to accomplish when it comes to their financial situation? (00:31)
Defining human capital (1:14)
What separates the rich versus the wealthy (1:45)
“Wealthy individuals are ones that understand income is not the most important. It’s actually net worth.” Erik Averill
Why just focusing on investment returns isn’t enough (2:42)
The importance of your savings rate and realizing your human capital (3:40)
Building your customized financial plan (6:16)
Combatting the sad stats of athletes filing bankruptcy (7:13)
Building your financial team (9:27)
“You want to hire a head coach that doesn't have a conflict of interest. If you were to hire an advisor that works at one of the big brokerage houses, they're not trying to help the team win all the time. Sometimes they're doing things just for themselves. That's the difference between an independent advisor and the big brokerage houses. It's as simple as that.” Zach Miller
Optimizing for after-tax returns (11:33)
“A lot of times, the advisors are good people, but if you incentivize them to sell products or they're only limited to selling the products of their firm, or pushed to sell those products of their firm, they're not giving you the best advice. They're not allowing competition in the marketplace to get you the best deal, or the best type of savings you can find.” Zach Miller
The value of a strong tax team (14:05)
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+ Read the Transcript
Erik Averill (00:00):
Hey, everyone. Welcome back to the NFL Players Podcast. We are your hosts, Erik Averill and Zach Miller. In today's conversation, we're going to jump into what does it actually mean to own your wealth? We just had a great conversation in the previous podcast about really, as an athlete, you have committed your entire life to being the best in the world at what you do, and that you should demand that from your professional team.
Erik Averill (00:31):
Zach, I'd love to, the same way that when we start an off season as an athlete in the gym of asking, "Hey, what are we trying to accomplish," what should players be trying to accomplish when it comes to their financial situation?
Zach Miller (00:42):
The biggest thing is you want to grow your net worth. It's as simple as that. Net worth is just all the value of all your assets and then minus your liabilities, net worth right there. Real simple. As athletes, you want to maximize your potential on the field, you want to maximize every little performance boost you can get. You want to do that on the field. You need to just translate that over to your finances.
Zach Miller (01:14):
You want to be able to grow that net worth and realize your human capital. All human capital is, is it's really just your future earnings and the potential of what you could earn playing football, and then afterwards. Being able to maximize that is a direct correlation to your net worth. It's how you grow wealth. It's how you keep wealth. Monitoring that, using every possible resource, professional, that can help you do that, is how you grow it.
Erik Averill (01:45):
I think that's actually the thing that separates what I would say people that are trying to achieve being rich versus wealthy people, like wealthy business owners. Wealthy individuals are ones that understand income is not the most important. It's actually net worth. It's about building assets that are sustainable, that are not dependent on you showing up to work every single day.
Erik Averill (02:09):
It's such a huge opportunity when you're a professional athlete that you have these huge incomes, but can you actually convert it into assets that are going to grow your net worth? One of the things we always talk about here is we're not optimizing for investment returns; we're optimizing for outcomes and after tax decisions. Can you shed some light on why maybe the return conversation is missing the mark when it comes to growing your net worth?
Zach Miller (02:42):
Yeah. A lot of returns are just quoted before tax, before fees, so you're getting a bad stat. It's not good to focus solely on that because it ignores risk. It ignores what you did outside of your portfolio. It's not a good metric. You want to have the best portfolio management and you want that, of course, but that's just baseline. You should expect that.
Zach Miller (03:10):
If you're not getting great portfolio management, you need to first take care of that. Then once you've taken care of that, you can actually learn how to grow your net worth, learn how to reduce your taxes as much as possible, defer income. These are the things that wealthy people do that, as soon as you can get wise to it as an athlete, as soon as you get wise to it as young player, you can really grow your net worth and establish generational wealth.
Zach Miller (03:40):
Another aspect of that that gets so often overlooked is savings rate. Really, when you're playing, your investment returns have such a little impact on your net worth. It's your savings rate and it's something that I was lucky enough to be able to have a high savings rate. When you can save at such a high rate and invest, then that money can co compound and really set yourself up for later in life.
Zach Miller (04:06):
When you're playing, it's about that savings rate and realizing your human capital. Anything you can do to help you realize your future earnings, whether it's protecting against injury, whether it's taking some of that risk off the table and getting the deals you deserve, whether that's talking with your agent more about what kind of outcomes you actually want out of your career.
Zach Miller (04:34):
Maybe you want to be the highest paid player. Maybe you don't. Maybe you want financial security. Those are things that your agent needs to know because they should be negotiating for that as well.
Erik Averill (04:42):
Yeah, and I think clarifying what success means is so important. We use this contrast a lot around here because, as athletes, we get it, the amateur versus the pro. The amateur talks about the deals that they're doing, the investment returns. They talk about how much money they make from an income standpoint. I saw this post the other day. It was a picture of Warren Buffet in a t-shirt. Then there was a picture of a guy in the jet and it was "Wealthy people act like they're broke and broke people act like they're wealthy."
Erik Averill (05:15):
Of course, that doesn't hold completely true, but it's optimizing for that net worth of saying I'm a wealth strategist. When I start to think about that, of going, "It's not just about investment returns," those are super important; that's a subset of it, but it's those after-tax returns. The analogy that you had shared with me, and I'm not a football guy, I'm a baseball guy, so if I screw it up, Zach will hit me over the head with this helmet right here, but it's being focused on my individual position, but that's not the definition of success for the team.
Erik Averill (05:50):
It's actually winning the game, which means I've got to put more points up on the board. Sure, the individual contribution of quarterback matters, but the whole team's got to play because we're actually optimizing to put a W up on the board. For your family, your investments are just part of your team. What we're trying to define is maximize net worth to achieve the outcomes that you determine are important to you.
Zach Miller (06:16):
It's different for every person, and that's why you need a customized plan with people that have the experience in dealing with people just like you and have walked the walk, have been in your shoes, understand what comes along with the game. There's so much that, unless you've played in the NFL, unless you've played professional football and been in that locker room and sacrificed your body and played through injury, you just don't understand what it takes and the sacrifice that's necessary to achieve that success on the field.
Zach Miller (06:52):
As you're thinking about those outcomes that you desire, your team of who you hire matters. It's doing the right research and picking the best professionals that get you to maximize your net worth. Eventually you'll learn that there's so much life after football and that you're going to be able to do so many other things.
Zach Miller (07:13):
What I don't want to have happen and what happens too often is the stat of players having financial insecurity or filing for bankruptcy. My goal is to change that stat to zero, that there's no more of that going on. You do that by taking care of your wealth, by taking ownership and making sound financial decisions, raising your financial IQ and controlling what you can control. There's certain things you can't control like market returns. You can't control those. You have to focus on optimizing all the other controllables in your financial structure.
Erik Averill (07:52):
Yeah, and I think here's the good news to everyone listening to this podcast, especially if you are the athlete. You actually have the skills to accomplish this because you've done it on the field. You've understood what it takes to be the best in the world at what you do, that you have to set your intention and then you start to figure out, "Okay, that's great. I want to play in the NFL." Well, all right. "Now I want to make the pro bowl. I want to be an All-Pro player. I want to win a super bowl. I want to sign a long-term deal."
Erik Averill (08:23):
You know those don't just happen by chance. You actually know it's highly, highly competitive, so you've got to figure out what are the skills that I need to develop, how do I need to improve my game? You seek out the best nutritionist. You seek out the best strength and conditioning coach. You go see Will Sullivan in Phoenix if you're a DB, trying to figure out how to have that extra step. You've done this your whole life, trying to optimize your performance on the field.
Erik Averill (08:50):
Really, that goal is to not only accomplish those accolades, but as a by-product, you're going to get paid. What we're trying to say is you've worked so hard to demand that money and that performance, that you deserve the same expertise and approach when it comes to your money. It's not just about putting an asset manager and an investment advisor on your team. It's actually higher in the offensive coordinator, the D coordinator, right, to make sure that we're looking out from the press box, we're looking down and saying, "Do we have the right players on the field to give ourselves the best chance to win the game?"
Zach Miller (09:27):
You really do think about it like you're assembling your own team, and you're the owner of your team. You take ownership. You get to hire the GM. You get to hire the head coach. You're hiring a head coach, you need to find the most qualified, certified financial planner to be the head coach. He runs everything. Your agent and him communicate, but your head coach, your certified financial planner, is then responsible for coordinating all those thing on your financial team, whether it's the offense, the investment returns with a CFA that's responsible for the portfolio, and getting it done on that side.
Zach Miller (10:08):
Then on the defensive side of the ball, your protection, whether that's insurance and being able to get a disability policy when you're going into a contract year, so you're protected on the downside. Those are the kinds of things. Those parallels are direct and they're true.
Zach Miller (10:24):
You want to hire a head coach that doesn't have a conflict of interest. If you were to hire an advisor that works at one of the big brokerage houses, they're not trying to help the team win all the time. Sometimes they're doing things just for themselves. That's the difference between an independent advisor and the big brokerage houses. It's as simple as that. If you play for a coach that's not trying to get the team to win, that's essentially the difference between the two business models.
Erik Averill (10:58):
Yeah, and I love the analogies. The guy you left out, and we've always heard this and as athletes, we argue about it, too, is defense wins championships. One of the most important things that it's not sexy to talk about is taxes. As an athlete, one of the downsides of having a high income is every state loves to tax you, right? We're all familiar with the jock tax. We're all familiar with the fact that we're in the highest tax bracket. Every four years when there's an election, we talk about what are the potential tax increases or changes as a professional athlete.
Erik Averill (11:33):
Everybody knows when you look at that first paycheck, half of it is gone. What we talk about is optimizing for after tax returns. This is one of those things that is so important, yet very few people are doing this. We'll focus on what's the deal flow. What are the investments? In the public stock market that historically has produced 10%, you're talking about your taxable rate, your effective rate, might be 40% to 50%. If we actually block and tackle on that side, it's putting more money in your pocket.
Erik Averill (12:07):
It's not just about how do you grow your wealth. It's how do you protect it. How do you optimize it? One thing that you started to hit on there is thinking like an owner. It's owning your wealth. Owners would never hire a head coach that has a conflict of interest. An owner wants to win. They want to win games to produce revenue to line their pockets, right? What they're never going to do is hire somebody who is actually going against their goals. It's wild. They would never do that. Yet, we do it on the financial side.
Zach Miller (12:40):
In my experience, it's just a lack of knowing. It's a lack of understanding the different models. It's always follow the money. If you follow the money, you'll find the truth. People are incentivized to hit monetary goals and it happens. A lot of times, the advisors are good people, but if you incentivize them to sell products or they're only limited to selling the products of their firm, or pushed to sell those products of their firm, they're not giving you the best advice. They're not allowing competition in the marketplace to get you the best deal, or the best type of savings you can find.
Zach Miller (13:21):
You do need that coordination. As far as the tax planning, you need to have that coordinated throughout your whole strategy, because you can really cause a lot of unnecessary taxes. I was guilty of this, of not having my CPA coordinated with my investments and I just paid unnecessary taxes. I was about at the 50% rate in California when I played there. Federal plus state, it's a significant amount of your income. Every NFL guy goes through this when they open that first paycheck. You see how much is taken out and you ask where the rest of it is. I'll get into some more funny stories I've heard on that one, myself included.
Zach Miller (14:05):
I knew the taxes were coming out, but it's always crazy to see at first. The more you can keep and that's after tax return. The more you can keep of your income, the better off you're going to be. It's as simple as that. Having a strong tax team is instrumental and it adds so much value. You need that on your team and that really should be coordinated with the rest of your advisors.
Erik Averill (14:32):
I love it. One of my favorite stories, one of our clients, I swear this is a true story. This was probably eight, nine, 10 years ago. He called me and he goes, "Who is FICA?" I'm like, "What are you talking about?" "This guy took money out of my paycheck named FICA." I was dying laughing, but it's really that reality of, as an owner, you're going to put an entire front office infrastructure around you that's going to help coordinate and give you the best opportunity to win the game.
Erik Averill (14:59):
Next episode, we're actually going to dive into what do the wealthiest people in the world do when it comes to managing their money. How do they optimize their net worth so that you can apply these same strategies to make sure that you are capturing the life and converting your income into earnings and into assets, so until next time, stay humble, stay hungry and always be a pro.