The Financial Game Plan Every Athlete Needs with Frederick Blue

[00:00:31] Frederick Blue: Thanks, Doug. Excited to be here.

[00:00:34] Doug Heikkinen: Before we get into the questions, can you tell us a little bit about yourself and your journey to Wells Fargo?

[00:00:40] Frederick Blue: Absolutely. I've been in the wealth management industry in different capacities over the past 33 years. Working with advisors, who work with affluent and high net worth clients.

Also, in leadership roles on the institutional wealth management side, working for companies like Vanguard Investment Company, Pico, Prudential Securities, as well as ING Group. So I came to Wells back in September of 2022. So, going into my third year with the organization within our Wealth and Investment management area. And one of the primary roles I have is leading the sports and entertainment program for Wells Fargo Advisors and working with those professionals who are managing and advising athletes and/or entertainers in those respective segments.

I'm based right here in Charlotte, North Carolina, but originally from Philadelphia, Pennsylvania.

[00:01:41] Doug Heikkinen: Every kid wants to be a pro athlete and very very few get the chance to become one. And then when they get there, they have a career that only lasts a few years. So in your experience, what are the biggest pitfalls athletes face if they don't plan ahead?

[00:01:59] Frederick Blue: Some of those pitfalls are both financial and non-financial. So, I'll start with the latter first, Doug. When athletes don't transition well, or they're not intentional about mapping out a plan for what they're going to do after their playing days, that's when they run into problems.

We see high bankruptcy rates across major pro sports within a few years of athletes retiring from that sport. So transition planning and being intentional about that, whether it's identifying opportunities that meet your interest, whether it's going into coaching, whether it's going into transitioning into the media like we see some athletes do today, or it is expanding your business interests and expanding that portfolio.

So we see athletes transition better when they have an intentional plan. They only have so much time to maximize their earnings, over a relatively short period of time. So you see on average across the major sports leagues, the average career tenure is less than five years. So some of the financial pitfalls is not having a team of experts around you that can advise you in your wealth management.

Some athletes are susceptible to receiving advice from family and friends, and that's not necessarily the best strategy. Also not keeping an eye on their finances as well as some of the things that they need to do during their career journey. For example, either avoiding or filing taxes late.

Yeah, that can result in some severe penalties and interests that would accrue over time. So those are some of the common pitfalls that we see within professional sports.

[00:03:59] Doug Heikkinen: I know all the leagues have programs when athletes are coming into the league to help them think about their finances. So what steps do you recommend they take early on to avoid this fate of struggling after they retire?

[00:04:14] Frederick Blue: Yeah, that's a great question. I think as you alluded to, each one of the sports leagues, I think do a pretty effective job on the onboarding front with orientation sessions that are led by their management team and their directors of player development. Athletes really need to take advantage of those resources, because they're going to cover a merit of of interest, right? And one of them being, financial, offering such things as financial education sessions, for them to learn about some of the basic strategies associated with managing your finances. Also introducing them to business planning, and how, if you are interested in starting a business and evolving a business, they have many resources for athletes, once again, to take advantage of and to increase their awareness about these opportunities.

Not to mention engaging centers of influence like agents, and making them aware and equipping them with tools and resources to provide to their athletes as well. So they need to take advantage of those opportunities. And as I mentioned before, establishing a plan and identifying the right experts across financial tax and legal to support them, and help them drive the right outcomes financially.

[00:05:46] Doug Heikkinen: So this message not only applies to pro athletes now, but more and more college athletes as they're getting paid from NIL and other sources these days. So more people are coming at them for help. So how can athletes balance their short-term financial goals? buying a home, supporting their family with long-term wealth preservation.

[00:06:09] Frederick Blue: It's important for athletes, even those that are, they've got this newfound money, for many of them, and some of the cash flows that they receive are uneven because they're coming from different sources now. It's a, as you mentioned, it's a different dynamic with the evolution of NIL. But just like the non-athlete, it's important for the non-athlete to do this, it is important for athletes to establish a budget. To establish a budget and map out what that allocation is going to be across both short-term goals and long-term goals. Every athlete's situation is different. But a rule of thumb that we see out there, in terms of a baseline is, hey, we need to make sure that we budget the income and our revenue that we're receiving from different sources to take care of our fixed expenses.

That's a number one priority, right? In the short term. In addition to making sure you're allocating some of that money that would be for an unforeseen emergency, for example. 20% or more, 20 to 30% should be allocated to some of the long-term goals, your long-term income planning, so that you are able to grow and preserve wealth over the course of not only your career, which once again, could be relatively short, but also your post career. So that's important. And then having a bucket for those discretionary spending items that, you obviously want to provide things for loved ones and interests that that athlete may have, in terms of assets that they want to acquire.

But it's important to, once again, be diligent and disciplined about that. So we would recommend strongly establishing a budget and sticking to it.

[00:08:10] Doug Heikkinen: We see some astronomical figures of what athletes are paid these days, and taxation is a major factor in an athlete's financial picture. So what are some smart tax strategies that they should consider?

[00:08:24] Frederick Blue: Well, number one, they need to hire a qualified tax advisor. And one, firms that have experience in working with professional athletes. We don't provide any tax or legal advice, but athletes need to be aware of the fact that you're receiving different sources of income.

It could be, once again, it's the income that you earn from performing services, for the team that employs you. They could be receiving endorsement income or royalties, licensing fees, and the like. Even, potentially, having some access to equity shares through various companies that want to sponsor them because of their brand.

So it's important to know the different sources of income and how they're taxed differently. Also, be aware of the fact that where you reside is important. Where you reside could cost millions of dollars. Because back in 1991, when the Chicago Bulls were playing the LA Lakers in the finals, the aftermath of that is the state of Illinois realized that California was taxing their athletes for performing services in that jurisdiction. And then you began to see this evolution of states copycatting that, starting with Illinois. And they actually referred to that particular statute that they established as Jordan's revenge, for example. So where you reside matters. So state tax rates are going to vary. From states like Florida and Nevada, where they have zero state income tax rates to California having one of the higher tax rates at 14%. So that's important to know and athletes need to be aware of what is considered to be the jock tax, where once again, those jurisdictions are going to get their pro rata share of tax revenue, as a result of them playing in that particular state. So some athletes are having to file anywhere from eight to 20 returns a year, and that needs to be managed, obviously, and professionally. And, once again, we recommend they get qualified help.

[00:11:06] Doug Heikkinen: Yeah. Getting the equity piece is important if you're at that stature and everybody should have a Mrs. Jordan. Many athletes don't realize, you just mentioned having the right financial team. What roles should key advisors, such as tax professionals, legal counsel, financial planners, play in their strategy?

Because as you mentioned, it's really complex.

[00:11:28] Frederick Blue: It is complex, and it gets more complex as they venture into to business interests. So, it's important for the financial, tax, and legal experts to work together and take a prudent approach. And in terms of how they're advising these athletes to drive the best outcome. And each one of them have to understand what those goals and objectives are. And obviously increase that athlete's awareness of different options that they may have. For example, some tax advisors will make sure that they understand the deductions that are available to them.

There was a legislation back in the fall of 2017 which limited or eliminated some of those deductions. I think it was the Tax and Jobs Act of 2017. And, that's scheduled a sunset next year. But there are other alternatives that advisors may recommend to these professional athletes, different types of business structures like LLCs or S corporations where that income could be passed through to the individual tax return and avoid, S corporations really avoid double taxation to the business owner. And avoid being taxed at a corporate rate and also at an individual rate. So it's a pass-through, but these are the types of structures that you commonly see.

But everybody's situation is different. And once again, those advisors, legal, financial, and tax, need to be on the same page to best help that athlete.

[00:13:16] Doug Heikkinen: Insurance and asset protection are critical, especially in a career where injuries can end everything overnight.

So what types of insurance should pro athletes consider?

[00:13:26] Frederick Blue: Yeah. The common insurances that will help mitigate risk, right? It's very important, whether you're an athlete or non-athlete. Many of these players play in different states than they reside in. That's something that we alluded to earlier.

So they have some property assets that go months where obviously, they're not around it, due to other responsibilities that they have in playing for the team that employs them. So subject to risk of peril, the risk of nature, the risk, societal risk.

We hear periodically of athletes' homes being broken into. So having the right property insurance and making sure that liability coverage is in place for those assets is extremely important. Related to the playing career, these athletes, they're their own CEO, they're their own brand, so they've gotta protect that brand, right?

Risk of injury, serious injury, is always something that they need to be aware of. So it's not uncommon for athletes to have contract insurance or personal injury insurance that mitigates the risk of pay, loss of income, due to a career ending injury. Many of these contracts though, are guaranteed as well, and also guarantee certain aspects of that income for injury purposes.

But having that added protection is important from an insurance standpoint.

[00:15:14] Doug Heikkinen: Endorsements and sponsorships can be really lucrative. We have Cooper Flagg signing with New Balance. He plays at Duke, which is a Nike school, and he can't even wear their shoes. So they also bring financial complexities.

So we touched on this, but how should athletes structure these deals to maximize long-term benefits?

[00:15:34] Frederick Blue: Number one, once again, we'll reinforce the need to work with a qualified tax advisor. But some of these endorsements can be potentially structured to pay out the cash flow over a number of years versus all in one year.

So that helps spread out the tax liability associated with receiving that revenue. They need to understand what those sources of income represent from a tax perspective. Many of the endorsements that one receives, whether they're a college athlete or a pro athlete, that could represent 10 99 income, right?

So, independent contractor income, there might be some self-employment taxes, that are associated with that. Once again, some companies, some sponsors are offering high school and college athletes equity shares. Well, nothing in life is free. And there could be some potential tax liability there if those shares are exercised. And gains may come into play, capital gains may come into play in addition to ordinary income as well. So it's important for them to be aware of the tax implications of each one of these sources of income. But if you can spread out the cash flow over a series of years, that helps.

[00:17:05] Doug Heikkinen: Sum up the conversation.

Can you summarize which steps athletes should take to ensure their wealth continues to serve them and their families well beyond their playing years?

[00:17:15] Frederick Blue: Yeah it's important. We had mentioned about the budgeting aspect of it. Working with a qualified financial advisor will help them establish a plan to preserve, grow, and then distribute that wealth according to their instructions.

And trying to do it in the best, tax efficient way. So it's important to plan early. Once again, you're trying to maximize your wealth growth and preservation over a relatively short period of time. Because that time could be some of your highest earning years, right?

So being able to work with an advisor, as well as the other experts, to set up different arrangements, whether it be through investment options, whether it be through trust, to help those individuals grow and preserve those assets, over time.

[00:18:19] Doug Heikkinen: Last one for you. If you could give one piece of financial advice to an athlete who just signed their major first contract or NIL deal, what would that be?

[00:18:30] Frederick Blue: I would say number one, leverage those resources that are available through the team that you're playing for if you're a pro athlete or through the college institution that you play for as as a college athlete. Many of these colleges and universities, especially the larger ones, are starting to set up an infrastructure that kind of mimics, a pro personnel department.

You look at what's happening with UNC, and hiring Bill Belichick. Well, he hired a long term friend and colleague in Michael Lombardi, who used to be in their personnel department with the New England Patriots. Managed that department, which helps source deals for college athletes, as well as, focus on the recruiting front, as well.

It's important, number one, for them to really be aware of what their options are. Take advantage of the resources that are available through those institutions that are going to help support them. Because they want to see them succeed, right? They want to see them be able to manage that newfound wealth well.

So that's important. As well as I would say, budget. Stick to a budget, be disciplined about it. Make sure you got the right people around you to help you manage your portfolio and protect your brand. Because also what you say and do can damage your brand and it can damage potential opportunities for you for more income and revenue stream as well.

So that's extremely important for the athletes to be disciplined about.

[00:20:21] Doug Heikkinen: Fred, this was interesting, informative, and really fun for me. So thank you so much for joining us.

[00:20:28] Frederick Blue: Doug, I had a fantastic time. You are a great host and thanks for having me today.

[00:20:33] Doug Heikkinen: To learn more about Wells Fargo Advisors, please visit wellsfargoadvisors.com.

Please follow us for time of the updates on X, LinkedIn and Facebook, all @Advisorpedia. For everyone at Advisorpedia, our producer Tory Miller and the Power Your Advice podcast team, this is Doug Heikkinen.