The following post originally appeared on Forbes | Dec 6th, 2013
Ask any photographer and they will tell you the same thing: different angles give you different pictures. While this statement is literal, understanding the metaphor isn’t rocket science. And though it applies to most of life’s work, it is supremely apropos to the NFL rookie’s career and the various cast members involved:
- The average agent sees a fully guaranteed $22M over four years, of which he gets 3%, minus $30K for pre-draft training expenses and another $10K for ancillary expenses, equaling a cool $620K.
- The average accountant or tax attorney sees the “jock tax,” federal, state and local tax codes, tax planning and IRS audits.
- The average marketing rep sees Campbell’s Soup commercials, a line of clothing and shoes, Gatorade endorsements and a syndicated talk show to round it all off.
- The average wealth planner sees bonds, mutual funds, low risk REITs and stocks.The average trust and estate planner sees wills, trusts and insurance policies.
- The average family member or friend sees a cash cow that owes them money because, well, they grew up together.
- The average beauty queen sees days at the pool, braggart phone calls to friends, nannies, jets, a spot on Reality Housewives and 50% of assets earned in the eventual divorce.
- The average NFL rookie sees stars… Matt Ryan’s five-year, $103.75M contract, David Siegel’s The American Versailles, a McLaren P1, yachts, nights at the club and waking up with the beauty queen…
Though all of these angles run in parallel, many are blind spots to even the most intelligent, savvy and astute rookie. With the average NFL player being (a young) 27 years old, only seeing 3.5 years of play time and receiving a median income of $770K per year, while they might not be able to fully retire from their field time, alone, they do have a pretty good start on life. The first and second rounders, however, make tens of millions of dollars and can retire from just their field play, alone – endorsements, deals and other investments are icing on the cake. But with a shiver of rookie-hunting sharks trolling the pool, these blind spots are a problem to the tune of 8 in 10 players going bankrupt or being under financial stress within two years of retirement due to joblessness and/or divorce. The status quo is broken, and the NFLPA needs to shift gears in order to fix it.
Why Are NFL Players Really Going Broke?
This question is about as loaded as a warship. Nevertheless, readers want to know, so the media has responded. Robert Pagliarini, president of Pacifica Wealth and sudden wealth expert, touches on things like risk-taking and short-term psychologies. Sports Illustrated’s Pablo Torre, in his article How (and Why) Athletes Go Broke, points to things like divorce, bad investments, poor tax planning and influence from friends.Jack Bechta, president and CEO of JB Sports Inc., points to conspicuous spending habits, weak financial counsel, chasing the spending of veterans, and more. With these in mind, once the athlete is able to realize they face such challenges and thus needs help, the wise counsel of a Robert Pagliarini, for instance, is a sizable part of the remedy. But most athletes don’t see these problems; they are blind spots, too, which renders them less useful in the NFLPA’s “fix it” algorithm. To find a solution, we need to dig deeper.
For a moment, drop any preconceived notions of what should happen and look at this more pragmatically. Do you think that in a few months you can reverse the conspicuous spending habits of a recently minted, top-of-the-food-chain athlete who, by all measures, has the world by the balls? The psychology that drives this behavior has been memetically driven into the community at large for decades – good luck fighting that. Or how about placing a wedge between the athlete and their long trusted friends, who, by any reasonable standard, are the furthest thing from fiscally competent? Yeah, right… Maybe we can change the athlete’s future orientation? Unlikely. When you really look at this – I mean cut it up, put it on a slide and place it under a microscope – the real challenge here is that the average athlete, along with the rest of their generational cohort, lacks sophistication.
Now before you jump down my throat, let me explain. No doubt you’ve heard the remarks regarding “dumb jocks” – that’s not what this is about. In fact, on average, these guys score above average on the Wonderlic – a mini IQ test given at the NFL combine. We are talking aboutsophistication, not intellect. These are two different but not mutually exclusive things. Merriam Webster defines sophistication as: having a refined knowledge of the ways of the world cultivated especially through wide experience. You see, the challenges and predators that an athlete faces – or any sudden wealth recipient for that matter – are many and varied. Aside from needing the intellect and raw knowledge to understand things like taxes, investments, intellectual property rights, etc., there are the various experiential and emotional components necessary to do things such as vet a “gold-digger” from a catch, see through a scam (or even just a poor investment) being pitched by a high-school friend, or understand that buying the entire bar a round of drinks brings in the wrong people… This type of wisdom and sophistication can only come about with education (formal and informal) and time and experience with variable situations. That rookies don’t have this is not a knock at them; it is out of their control. Being a function of age/time and exposure to many different experiences, it affects the rest of their generational cohort, too.
Regardless of their lack of onus, the NFL rookie’s salary quickly rockets them to a sky-high socioeconomic strata, but without the executive skill, knowledge, experience and sophistication that most of their new-found peers acquired on the way there. To really hammer this home, look at these problems through the eyes of a Bill Gates or Warren Buffet or even those of a successful, but localized business man. Do they takeuncalculated risks? No. But even if they did, the risk would be buffered by other hedged investments. Do these men file their taxes on TurboTax? I rather doubt it. How about keeping their focus on the future? Absolutely… Do you think that they have their estates planned like a Navy Seal drop? I can’t say for sure, but if we were in Vegas, I’d bet the farm on it. While education and intellect can and do help in making the right decisions, deploying those tools over time and in different situations refines them – that is sophistication.
Wolf In Sheep’s Clothing
Are rookies, if not the entire league, incapable of handling their own money? Well, yes, actually, Sports Illustrated’s statistics prove this. But unfortunately the solution cannot be aimed just at the athletes, alone. For example, in an attempt to help mitigate the problem, the NFLPA launched an award winning financial education program meant to support and provide direction to current and retired athletes. But sophistication can’t be taught in one or even a few classes. It is one thing to learn some accounting; it is another to have managed millions of dollars for decades. That athletes continue to meet financial distress in droves is proof that more needs to be done. Can the NFLPA just take charge of the athlete’s money from day one, pay them only a portion of it and invest the rest? Possibly, but I don’t see the players supporting that. The next best thing, and frankly the only pragmatic option, is to influence the athlete’s trusted advisers. This is where the answer lies, but where current arrangements fall short.
Players generally go to one of three sources for business advice: family members and friends, other athletes and their agents. Let’s look at each briefly. The average NFL player, though extraordinary in a physical sense, was raised in an average home, by average parent/s with average incomes. As such, they reaped the fruits of an average socioeconomic upbringing, including average friends, family members and acquaintances, along with little travel and culture. This means that the average NFL player – the 80 percent – does not have access to sophisticated, above average professional and financial advice. Their uncle is not a wealth adviser; no friends launched a hugely successful business; their grandfather did not set up a trust for them; their parents don’t golf with Peter Lynch. Where managing millions of dollars and intellectual property are concerned, any advice they receive from those close to them is inadequate at best. As far as getting advice in the locker room goes, this is quintessentially the “blind leading the blind.” There is an 80% chance that their locker room adviser will be bankrupt in the near future. So the rookie is left with one legitimate avenue of hope: their agent. However, the current standards set forth by the NFLPA’s Standard Representation Agreement (SRA) and Regulations Governing Contract Advisors (RGCA) place the interests of the two classes at odds.
The NFL Agent and Moral Hazard
When it comes to managing the player’s career and finances, the franchise-grade sports agent is held in much the same regard as any franchise veterans roaming the locker room – high. The athletes respect their agent, trust their agent, look up to their agent and expect that their prosperity is being protected by their agent. Generally speaking, however, much of the trust is misplaced because though the agent carries the air of a financial adviser, tax planner, etc., they don’t do these things because they can’t and shouldn’t.
Per Wikipedia, the principal-agent problem or agency dilemma concerns difficulties in motivating one party (the “agent”), to act in the best interests of another (the “principal”) [or athlete in this case] rather than in his own interests. The problem arises where the two parties have different interests and asymmetric information (the agent having more information), such that the principal cannot directly ensure that the agent is always acting in its (the principal’s) best interests, particularly when activities that are useful to the principal are costly to the agent, and where elements of what the agent does are costly for the principal to observe. Where this type of environment exists, moral hazard – the lack of any incentive to guard against a risk when one is protected against it (as by insurance) – and conflicts of interest may arise. Let’s dissect this.
Section 1B of the NFLPA’s Regulations Governing Contract Advisors states:
The activities of Contract Advisors which are governed by these Regulations include: the providing of advice, counsel, information or assistance to players with respect to negotiating their individual contracts with Clubs and/or thereafter in enforcing those contracts; the conduct of individual compensation negotiations with the Clubs on behalf of players; and any other activity or conduct which directly bears upon the Contract Advisor’s integrity, competence or ability to properly represent individual NFL players and the NFLPA in individual contract negotiations, including the handling of player funds, providing tax counseling and preparation services, and providing financial advice and investment services to individual players.
At first blush, along with negotiating the player’s contract, this sounds as though the NFLPA is also governing the provision of (i) financial advisement and investment, (ii) tax counseling, and (iii) funds management. If you look a little deeper, however, you’ll see the legalese – “…activity or conduct which directly bears upon the Contract Advisor’s integrity, competence or ability to properly represent individual NFL players and the NFLPA in individual contract negotiations, including…” in other words, they are simply ensuring that the agent cancompetently do those things, but are not requiring them to do so. Further, in the Standard Player Agent Agreement, Provision 3 (Contract Services) states:
Player hereby retains Contract Advisor to represent, advise, counsel, and assist Player in the negotiation, execution, and enforcement of his playing contract(s) in the National Football League. In performing these services, Contract Advisor acknowledges that he/she is acting in a fiduciary capacity on behalf of Player and agrees to act in such a manner as to protect the best interests of Player and assure effective representation of Player in individual contract negotiations with the NFL Clubs. Contract Advisor shall be the exclusive representative for the purpose of negotiating player contracts for Player. However, Contract Advisor shall not have the authority to bind or commit Player to enter into any contract without actual execution thereof by Player. Once Player agrees to and executes his player contract, Contract Advisor agrees to also sign the player contract and send a copy (by facsimile or overnight mail) to the NFLPA and the NFL Club within 48 hours of execution by Player.
At first blush, this openly states that the agent is only required to negotiate the contract. And if you dig deeper you’ll still find the same thing… As a result, most agents ONLY negotiate the player’s contracts and nothing more. In fact, because the gross majority of agents aren’t (actually) providing financial advice and truly comprehensive career management, agents that provide a wider range of services may unnecessarilyexpose themselves to further liability, however threatening that may be. So, while representing the best interests of the athlete should include things like wealth management, intellectual property protection and management, trust and estate planning, marriage and family (legal) counsel, corporate and deal advisement, litigation representation and contract negotiation, the sports agent is negatively incentivized to keep directly within the letter of the NFLPA’s contracts by unnecessary costs and risk. This generates a true conflict of interests – those of the agent and the NFL player that he is charged with protecting.
Athlete representation is considered a credence good, which means that the value derived from the services cannot be readily measured by the principal (the athlete). Sure, the player sees the dollar value of their contract once they’ve signed, but how can they know that the agent negotiated to the best of their abilities? Also, how can they know whether another agent would have done a better job? They just can’t… Exacerbating this is the significant gap in the knowledge-base and skill sets of the agent and the athlete. Where the athlete knows football inside and out, they have little to no experience negotiating contracts, reading spreadsheets, reviewing past contracts, matching player statistics, etc. To illustrate, would you feel confident auditing the work of your accountant? Your real estate agent? Your doctor? Unless you’re doing their job all day, every day, you probably wouldn’t. The credence nature of the agent’s services combined with the disparate knowledge bases and skill sets results in massively asymmetric information.
The Removal of Risk
Generally speaking, potential risk to the agent comes in three forms: sanctions from within their practice or the NFLPA, the loss of an athlete to other representation and a possible law suit due to malpractice.
Where the NFLPA is concerned, the sports agent fulfills their fiduciary obligations by (i) providing truthful information in their application, and (ii) successfully negotiating and consummating the player’s contract. Because the quality, rigor or zealousness with which the agent negotiates is not defined by the NFLPA’s contracts, as long as the athlete’s club contract is consummated, the agent has fulfilled their legal obligation. The burden of these two requirements is sufficiently small to bear little to no risk to the agent. Further, the average sports agent is either in a solo practice or is a true alpha within their agency. This separates them from those that might have the knowledge to truly judge their work and the ability to reprimand them via collegial monitoring and adjustment.
Where the athlete is concerned, acceptability of the agent’s performance is subject to the athlete’s relatively uninformed approval. Do you remember the notion of asymmetric information? If the athlete can’t tell good from bad, how can they blow the whistle? Further solidifying the agent’s position of athlete ownership are anti-poaching regulations set forth by the NFLPA, which, while they are shirked by some agents, do add a level of protection for the more scrupulous agents.
Lastly, if all else fails and the agent does a bad job – much like pornography, you can’t necessarily define a bad NFL deal, but you know it when you see it – agents are now required to purchase malpractice insurance, which protects them in the rare event that they are sued.
So, as long as they don’t break any state or federal laws, the average sports agent faces little to no risk at all aside from spending money and resources on players that don’t sign with them, sign with them and don’t get drafted or sign with them but whose careers are cut short.
Fox In Charge Of the Chickens
Now, the attributes that temper the agency-dilemma in a free market are (i) the assumption that the agents are risk averse, i.e., they seek to protect the sanctity of their positions by acting conservatively and avoiding unnecessary risks, and (ii) the agents are assumed to be competent to take on the task at hand. As we can now see, an agent’s appetite for risk is almost irrelevant in this equation – adequately educated wimps could fulfill the requirements and duties set forth by the NFLPA contracts. Likewise, I rather doubt that many would argue the risk-seeking appetites of sports agents in general. Though overly gratuitous, I will use Drew Rosenhaus’s shark wrestling episode as my proof.
The “competency” of the average NFL agent is debatable. The barrier to entry into NFL player representation is, indeed, high in comparison to the NBA and MLB thanks to (somewhat) recent efforts by the NFLPA. However, it is relatively low compared to other corporate institutions or positions that might generate similar levels of income and/or carry the same heightened level of responsibility – CEO’s, surgeons, major law firm partners, etc. And regarding the other services that should formally be provided by the agency – tax and intellectual property, for instance – most if not all agents don’t possess the requisite skills and/or education necessary to effectively address those avenues.
The result is that the average agent provides significantly less representation than the athlete requires because, in short, they can’t. Further, by doing more than what the NFLPA contracts stipulate they unnecessarily expose themselves to more risk while incurring added time and expense. Lastly, because there is little risk of being sanctioned or losing a client, and because income is directly linked to the signing of contracts, the average agent is generally better served to negotiate more contracts, quicker, and at a smaller percentage of the contracts’ potential. This is in contrast to negotiating fewer contracts, slower, and at their full potential. As such, many agent’s business practices and resources are focused toward marketing and sales and hype so as to sign as many athletes as possible. To illustrate, I’ll point to Drew Rosenhaus, again, who convinced NFL general managers to allow cameras to document negotiations.
So What Do We Do?
Ideally, the NFLPA will take a hard look at this article, agree with it, and change a few things, most notably the scope of services that the agent is required to provide and manage. And while I am not holding my breath for such changes, the current market does bear an answer for the astute athlete – large law firm representation.
The spark to this article was a conversation I had with Adisa Bakari – chair of Kelley Drye & Warren LLP’s Sports Entertainment Group and veteran NFL agent. I initially approached him to discuss the state of NFL player finances, the rapid evolution of the business of professional football and the scope of his practice. Along with negotiating the player’s contract, Bakari’s BigLaw representation of athletes includes the areas of: (i) corporate and deal work for any endorsements and the evaluation of business opportunities, (ii) marriage and family law for prenuptial and custodial matters, (iii) trust and estates for wills and estate planning, (iv) tax law for protection and planning, (v) intellectual property for protecting and effectively monetizing the athlete’s name, likeness, logos, memorabilia, etc., (vi) charitable trust planning, and (vii) litigation services, if and when the athlete comes under fire.
The bottom line is that today’s athletes make significantly more money than those of just 20 years ago, and as Biggie says, “more money, more problems…” Bakari confirms this: “For today’s professional athlete, the money is simply too large and the legal and business issues are too complex for the traditional, singular sports agency to adequately handle. There is no escaping the fact that unless professional athletes are guarded by traditional business law firms, they will be financially exposed. The seemingly ever-growing failure rate of professional athletes more than substantiates this reality.” And while I did not initially discuss the NFLPA, the agency-dilemma or moral hazard with Bakari, when I looked at the scope of his firm’s service offering in comparison to the agency market at large, I thought it deserved further investigating. Here’s what I found:
For starters, a large-scale, professional service firm provides its clients – the athlete, for example – with exponentially more collegial monitoring and adjustment than would a solo or small firm. This means that the BigLaw agent has hundreds of highly qualified partners, who don’t suffer from asymmetric information, watching over his conduct to ensure that he doesn’t compromise valuable reputational capital. In Bakari’s case, he has approximately 150 partners and they are protecting nearly two centuries’ worth of history and reputation (Kelley Drye was founded in 1836). It is incumbent upon him to hold his fiduciary responsibility to a much higher standard than most traditional sports agencies that don’t share the same size, history or reputation.
In terms of competency, BigLaw provides an inherent junk-filter where caliber and quality of the agent is concerned. You don’t, under any circumstances, become a partner at a major firm without top-notch academics and elite legal and business acumen. So, while the average sports agent may have gotten their MBA or gone to law school, BigLaw partnership status is objective proof of the quality of an agent’s academics and skill set. Regarding the other areas of representation, any major full service law firm maintains direct access to highly qualified representation in most of the areas of concern – tax, intellectual property, corporate, etc. And where an agent like Bakari does not have direct access to a practice – wealth and accounting, for instance – he has access to partners who are uniquely qualified to monitor the quality of those that he refers his athletes to.
Further, BigLaw partners are paid a salary along with year end profits. This goes a very long way toward mitigating the conflict that arises between closing more deals, quicker, and fewer deals, slower. With monthly cash flow in the multiple tens of millions, cash flow is not a negative motivator where stalling in negotiations is concerned. Lastly, BigLaw has significant horsepower. If s$%t hits the fan – which sometimes it does for athletes – a BigLaw agent has immense capacity insurance at his disposal. In fact, when sports agents get into trouble themselves, their next stop is a law firm…
There are challenges, however, for the BigLaw agent, beginning with the ABA’s professional conduct rule 5.4(a), which states that a lawyer may not share legal fees with a nonnlawyer. In other words, a law firm cannot maintain monetized relationships with wealth managers or accountants. This does not, however, preclude the BigLaw agent from referring athletes to qualified advisers, and facilitating and monitoring the ongoing relationships with those professionals. Also, athlete representation in a BigLaw setting is a very nontraditional practice in a very traditional world. No doubt that some firms would (and do) have difficulty wrapping their heads around a practice that isn’t directly driven by billable hours. As BigLaw sports practices stand today, most represent the franchises/clubs, and not the athlete, creating a conflict of interest should the firm decide to branch into athlete representation. One of the more prominent BigLaw practices that focused on athletes was at Williams & Connolly LLP, which included James Tanner Jr. and the venerable Lon Babby. Both attorneys have since left, however, to pursue other endeavors.
As statistics stand today, a dramatic shift needs to be made in the governance and culture of NFL player representation. With exponentially more media reporting on the phenomena we’ve discussed, athletes are beginning to take notice and adjust accordingly. With some help from the NFLPA, practices like Kelly Drye & Warren LLP’s will help force the evolution of athlete representation, further protecting the league’s only true asset – the players – and shuttling them into their rightful executive-hood.