Careers in sports and entertainment follow unique financial trajectories that may benefit from a tailored investing approach.
Three college football players enter the National Football League draft during the same year. Joshua, in this hypothetical example, is drafted in the first round and goes on to a 12-year, Hall of Fame career. He earns more than $130 million while building a brand that yields lucrative endorsements, including a signature line of athletic wear. He is able to retire at 33 with $50 million in investable assets and enough reliable income to cover the better part of his regular expenses.
Jonathan goes on to earn $10.5 million over 10 years. He also retires at 33 but with $5 million in savings, supplemented by occasional income from local speaking engagements and appearances at youth clinics.
Walter, however, goes undrafted due to off-the-field complications. Quick, strong and aggressive, he trains to become an Ultimate Fighting Championship contender, achieving considerable, if uneven, success. Over the next 12 years, he earns between $12 million a year and no income at all. At 33, he has $20 million to invest, but his earnings potential is less certain.
Implications for Wealth Planning
Athletes and entertainers face complex financial challenges. Their peak earning years often come at a young age, and their career paths are difficult to predict. Pay schedules may be seasonal and vary from year to year. They often have a relatively short and unreliable period of wealth accumulation, and may struggle to maintain a comfortable lifestyle while also laying the financial foundation for extended retirement.
In fact, studies show high rates of financial stress and bankruptcy risk among sports stars and entertainers. For example, a 2009 Sports Illustrated study found that two years after retirement, 78% of NFL players faced financial stress or had even gone bankrupt. In another study, released in April 2015, the National Bureau of Economic Research found that nearly 16% of former NFL players file for bankruptcy within 12 years of retirement.
While popular entertainers can earn in excess of $100 million in their careers, the median annual income for actors, directors and producers in 2013 was less than $70,000, according to the Bureau of Labor Statistics.
This significant variation in their career trajectories further complicates wealth planning matters. “This not only impacts their earnings potential during their playing or performing years, but also continues to have major implications in their wealth planning for the rest of their lives,” says Lisa Shalett, Head of Investment Portfolio Strategies at Morgan Stanley Wealth Management and member of the Global Investment Committee (GIC), which has developed an investing framework for athletes and entertainers based on their cash flows and earnings power (see Exhibits A and B).
Three Levels of Earnings Power
Based on the GIC’s investing framework, Joshua, who can be categorized as a “Blue Chip” power earner, should focus first and foremost on protecting his significant accumulated wealth before turning his attention to growth. With substantial assets and continuing income, he has the latitude to choose a strategy that fully reflects his appetite for risk. Therefore, he might want to consider strategies that focus on both capital preservation, with a high concentration in fixed income, and high growth, heavily weighted toward equities. Since he doesn’t need access to a lot of ready cash, he might also consider longer-term investments such as private equity or hedged funds.
Jonathan, whose earnings power is that of a “Playmaker,” needs his portfolio to support his lifestyle over a retirement that could last more than 50 years, given the Playmakers’ generally shorter career and lower earnings potential compared with their Blue Chip teammates. While he shares his Blue Chip colleague’s concerns with capital preservation, he needs his portfolio to generate reliable income through a longer retirement, while producing enough growth to keep pace with inflation. The GIC’s asset allocation framework suggests that his assets be skewed toward equities and include some longer-term investment vehicles.
Finally, Walter has “Wild Card” earnings power and needs to protect the assets he has accumulated, while generating cash during gaps in his income stream. Time-segmented asset-allocation could be a useful approach. Walter’s strategy would involve creating a number of different portfolios, each one geared to offer a steady stream of income during different phases of retirement.
Exhibit A: Hypothetical Portfolio Allocation for Each Earnings Category
Exhibit B: Hypothetical Portfolio Return Characteristics by Earnings Category
These are but some of the custom investment approaches available. A planned approach with the right asset allocation framework can help athletes and entertainers preserve and, in some cases, enhance their career earnings.
“Perhaps more important,” adds Shalett, “this approach can help these investors maintain a comfortable living during their retirement, fulfill their philanthropic objectives and provide a strong platform for transferring wealth to the next generation.”
Learn more about Morgan Stanley’s Global Sports & Entertainment division, or contact a Sports and Entertainment Director for a copy of the GIC white paper, "A Wealth Optimization Approach for Athletes and Entertainers."