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Comment by southphillyman | Hacker News Reader

The stereotype is that many of these athletes go broke because they are foolhardy with money. I appreciate that this article highlighted that a lot of these guys go broke because of scamming financial advisors.

The athlete attempts to do the responsible thing and hires someone they are led to trust with managing their assets only to be ripped off. I'm not sure how financial literacy prevents this from happening when you literally may be lied to about where your money is.

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Agreed, look at it from their perspective. They haven't been around a lot of money before, they don't have a lot of friends who have been around a lot of money either, so they don't really know even what questions to ask to understand the people who are arguing to be their financial advisors.

Perhaps major league sports would do well to help train their athletes in the basics of financial management in order to help avoid this situation.

It's not their responsibility though. The player could take a course on their own initiative.

Which courses do you recommend?

I'd start with a course on basic accounting, which you can get at your local community college. It's critical to be able to read and understand a financial statement, and it's not that hard, either.

It doesn't need to be their responsibility, it is something they could do and wouldn't cost them much.

If anything it could help with their recruiting efforts: Show a list of athletes that got screwed by shady advisors; show how they'll connect you with real advisors (at established and more trusted institutions) and education to discern what options are good and what aren't.

Won't make a difference when tyring to get that top QB, but it may for all those guys who're only making $150k-300k.

Its true they could. I think of it like auto repair shops. Here is something really valuable to your daily life, and you want it taken care of properly, but how do you verify that the person you are talking to is honest and trustworthy? You could buy the factory service manual for your car and read it cover to cover, with digressions into the parts which are assumed to be known by anyone servicing a vehicle, and then you could evaluate an auto mechanic's answers based on a ground truth of the service manual, but how many people actually do that? 1% ? 10% ?

In my experience in the Bay area with people who suddenly have more wealth than their friends and family ever did, there are two ways that people seem to split. Either they start splendiforus spending because they are "rich" or the start calculating what sort of 'burn rate' they can support drawing down at a rate of anywhere between 2% and 10% of their net worth. Using the 4% number (which used to be the standard before the great recession knocked it back to 2% for more conservative savers).

One of the things that people usually don't think about deeply is that money in the bank pays you, things that you own cost you. A car needs gas, a jet needs maintenance, a home needs gardening. And when you scale up the 'thing' you scale up the cost. As a result if you live what you perceive to be a 'rich' life you may find its sucking your wealth away. There are lots of studies on lottery winners which show this effect.

> In my experience in the Bay area with people who suddenly have more wealth than their friends and family ever did, there are two ways that people seem to split. Either they start splendiforus spending because they are "rich" or the start calculating what sort of 'burn rate' they can support drawing down at a rate of anywhere between 2% and 10% of their net worth.

Wow that's depressing as hell. I've seen the spending side of things, but for a long time out of college I was making more money than anyone I knew and also spending towards the bottom of the distribution. I think I was 25 when my average return started covering my cost of living.

My family didn't have much money growing up (due to medical reasons) and my parents don't really know much about managing money, probably because they both come from upper-class backgrounds where family money just seemed "taken care of". So I have to confess I'm not really sure where the financial irresponsibility of the sorts discussed in this post comes from. I'm tempted to say that it's a simply matter of high time preference, but that's a really self-serving explanation, so I'm not quite satisfied.

I feel the same. I have been in the top 2 to 3% income-wise but I spend money like I am on food stamps.

Nobody tries to keep their costs below their income? If I was suddenly wealthy, I'd try hard to make sure lifestyle spending was covered by growth in my wealth, not by drawing it down.

The NFL already does: https://www.marketwatch.com/story/this-nfl-training-camp-tur...

Like any employer, it isn't actually in leagues' interests for their employees to have financial acumen. Your boss loves to see your new $50k vehicle in the parking lot.

You're right, them having debt like that means they're more likely to stick around (because they can't afford to quit). But it also means they could be more mercenary (seeking out the jobs that get them out of the debt, or let them keep spending themselves into debt).

Debt also puts people into compromised positions. Having worked around defense stuffs, that's an exploitable position. And people will exploit it. It's not just for government secrets either. Working on a corporate X project to make the latest and greatest self driving car? Have 6- or 7-figure debt? Someone may slide up to you in a bar and buddy up, take advantage of the desperation and get you to compromise your employer's secrets. For athletes, this means getting asked to throw games and underperform.

For six figure debt? I was under the impression that six figure mortgages were pretty common...

The picture he has in mind here is probably more like six-figure credit card debt.

That’s what I had in mind. Or maybe being underwater on a mortgage or a second mortgage. But generally I meant high interest, high principle debt.

The best thing a person can do in such a situation is to put the money in a savings account, and then set about learning what to do.

Nobody is going to have their best interests at heart but themselves. If you want to have money, you have to learn to manage it yourself. There's not really a choice about it.

Also, hire a properly licensed CPA. Make sure to listen to his advice on taxes. Don't give him a financial incentive to benefit if you follow his advice.

If you put that kind of money in a savings account, the bank will call you twice a day until they have made you move the money into something more profitable (for them.)

Your bank will stop calling you if you threaten to move your account.

BTW, any sane business would put their best salesmen on dealing with their wealthier clients, and those salesmen will know that haranguing customers on the phone is hardly the best way to sell them.

Actually, you might be surprised at how often a soft no means yes, in business. Of course, in one's personal life, people try not to be rude, so a soft no is often really a hard no. An athlete or doctor or lawyer who is too busy to give the salesman the time of day might be really interested but simply too busy to make time for the call. A good salesman won't give up after the first soft no. It is often the case in these situations that persistence is polite.

I would be surprised if the bank complained. They are only on the hook for $250K per the FDIC and could cover it with a low interest interbank loan from the FED. Since their mandatory reserve is only a fraction of the cash on deposit they will happily leverage it for greater returns paying you your paltry .7% while collecting much more than that.

This highlights the problem-- the most "conservative" approach, a savings account, is actually TERRIBLE financial advice. First the money won't keep pace with inflation and second a bank failure will wipe out the fortune. That happened to savers in 2008, most notably the failure of IndyMac.

Of course. But you have to park the money somewhere while you learn about where to invest it.

If you've got more than $250K, I'd split it up into multiple accounts at different banks.

I suspect this is per depositor not per account... but I'm not sure.

FDIC covers $250,000 for all of a persons accounts in one bank. So you just need to have accounts in separate banks to 'increase' your coverage.

https://www.fdic.gov/deposit/covered/categories.html

It's per account and can be doubled with a "payable on death" designee.

> It's per account

I think you're mistaken about the first part of your statement:

The FDIC says, "All single accounts owned by the same person at the same bank are added together and insured up to $250,000." (see https://www.fdic.gov/deposit/covered/categories.html )

But you are correct that it can be doubled, tripled, quadrupled, or even greater by opening different account types such as a Retirement Account, a Joint Account, a Revocable Trust Account, etc., at the same bank since each account type seems to get separate treatment (according to the same FDIC link).

So- Your money not keeping pace with inflation is better than anyone profiled in the article managed. Worst case scenario, bank failure, they might still be better off.

People fall into two broad traps. Either they are loosing money for no good reason (a consumption culture with ever escalating healthcare/edu/housing prices makes this simple), or they are accumulating money for no good reason, thanks to some class they took that says beating inflation is the point of their story. Once your housing/family healthcare/edu expenses are taken care off kiddos, there is no good reason to be beating inflation. Unless you are trying to build the Taj Mahal or something.

Actually there are some very straight forward wealth management schemes that may not get you the most return on your money but are better in nearly every metric than putting your cash in a bank savings account. The canonical example is a treasury ladder.

The bank wouldn't complain but if your account is significantly above the FDIC's $250k limit, it's usually worth it for them to invest a few days or weeks of a salesperson's time to get you to convert to a more profitable investment account. That kind of human attention is just not profitable with an account that only has 10s or 100s of thousands of dollars.

A savings account without a fixed term requires that the bank balances that with reasonably short instruments. If it's a huge sum they will get nervous since they need a certain amount of liquidity as reserves and that's expensive. Keeping liquidity over the night gives very little interest, or even negative interest in some countries.

Savings accounts don't do great over the long term. The safest thing is usually just to buy real estate as long as the prices aren't stupid.

You start with “the safest thing is..” then suggest property, only if they have knowledge of what prices are reasonable.

Doesn’t sound safe. Index fund would probably be safer. Or savings account.

Do you know many people impoverished in their old age because they bought a couple of houses (assuming no mortgages)? Bank savings inflate away, stocks crash, houses are typically as safe as houses.

Houses cost property taxes, insurance, and maintenance. Those have been known to force seniors out of their homes.

The canonical problem isn’t “a couple of houses as part of a diversified portfolio”. It’s “entire net worth is effectively tied up in one house”. We saw what happened with this 10 years ago. Houses are only reasonable stores of value if there is some scarcity attached to the particular house.

property markets still collapse. Towns turn into ghost towns, it’s not bulletproof. The absolute safest thing is cash in a bank. It’s an absolutely terrible investment, and you’d be an idiot to do it, but it’s safe.

This article is from 2009, which, if you'll recall, was not a banner year for demonstrating the stability of real estate investments. Also, as detailed in the article, a big problem with real estate investments is knowing whether an investment is really worth what you are paying.

It is sobering math to figure out that a million dollars is only about $25k a year for the rest of your life.

A million bucks will make the rest of your life easier as long as you don't 1) spend it all and 2) don't make yourself unemployable (injury, bad PR, etc)

How are you computing that?

Perhaps you are forgetting that an investment still grows while you are withdrawing from it?

Here is a calculator that helps you compute how much you can actually pull from it: https://www.money-zine.com/calculators/retirement-calculator...

If you set the initial variables to:

- Retirement age 40 - Life expectancy 83 - Annual Return 7% (typical of stocks) - zero out everything else (no pension, no social security)

You get about ~$74K a year.

Even if you started retiring at age 25, you'd still be pulling ~$71K a year.

This is not a good way to calculate it because it ignores volatility of the investment. There are decades of publications in the topic of sequence of returns and the impact on retirement.

$25,000 is likely a little too low but $70,000 is way, way too high.

Most people who've done research agree that something like $25,000 to $35,000 a year from $1,000,000 is reasonable for someone retiring extremely young.

Which corresponds to 2.5 - 3.5%. Back in the 90's when I was doing my research 4.2% was the "magic" number. Of course your life expectancy has to factor in to, so if you boost your withdrawal rate as you get older you can try to hit $0 right when you die. (like timing the market, not recommended)

As people point out the thing to remember is that your costs change too, your health care costs go up but if your family moves out and you pay off your house your outlays go down. "Downsizing" or reducing the owning of expensive things (especially ones that require maintenance) can really help your burn rate.

May I suggest taking a look at https://earlyretirementnow.com/2016/12/07/the-ultimate-guide... - it's the best guide I've ever found on optimal safe withdrawal rates.

Your number was almost certainly based on a 30 year retirement timespan.

An athlete might be 30 years old at retirement and needs to think about a 65-year retirement timespan.

That was clearly off the cuff. But we're here in the context of people with new money blowing it all, so let's stay there instead of imagining we're talking about something else.

First, start with the 25 number. We're talking about athletes here, they aren't losing their income potential at 40, they're losing it a lot earlier than that. There are 40 year old athletes, but we talk about them all the time because they're unusual, not because they're the norm.

Next, cut the rate of return. Like by half. Nobody with new money is that successful with their finances. That's why we're discussing this.

Now, I wasn't thinking about this too hard when I did the math in my head, but I do tend to round down pretty heavily when doing math for myself for a very particular reason: adjust down for inflation. Way, way down. The biggest fuckup people make when rationalizing their rate of savings or how great an investment their house is: by the time you get to use this money thirty years from now it won't be worth half of what it's worth right now. Present day you thinks 25k a year will pay your rent. 70 year old you will have to move to the middle of nowhere to say that. You won't want to do that. So double your withdrawal rate by 60 and almost again by the time you die.

Yeah, that was my thought too - don't all these sports have players' associations / unions? What in the world are they doing, if not helping with this problem?

This is generalizing people of different backgrounds' knowledge of securities. There are plenty of middle/upper class people who buy into idiotic mutual funds with a 3% front load fee. Wtf? Heck, many employers still offer absolute garbage funds in their 401k.

I wholeheartedly agree that major league sports should provide financial management skills, however the same should also be provided at large corporations.

I think there is a difference between buying into a 3% front loaded mutual fund and investing in a restaurant in downtown Miami. The first is suboptimal and almost certainly won't beat the market, the other is likely to lose 100% of principal invested within a few years. I guess the equivalent for a non-wealthy person would be to invest all their money into lottery tickets.

Suboptimal to say the least. https://investor.vanguard.com/mutual-funds/low-cost

With Vanguard/Fidelity/Schuab you can make only 45k/yr over your whole career, put the $5500 into an IRA in VFIAX/VOO starting at age 22, and have an retirement income of $58k/yr (not including social security) when you retire. This approximately 1.1-1.5 million in retirement is enough savings IMO, and allows you to pursue whatever career you want, e.g. nonprofit/teaching/part-time with much less anxiety than a traditional pension or more active investment like a restaurant.

Maxing out an IRA is only a 12.2% pre-tax savings rate for someone with a $45k/yr income. This is not difficult at all, however it is important that it starts in the early 20s.

I'm not convinced it's as black and white as that. Look at the example given (Rocket Ismail). Not to pick on an individual, but he doesn't seem to be taking responsibility for any of his losses, even with the supposed "hindsight" he now enjoys:

-"One of his advisers pitched the idea as"fail-proof, with no downsides," Ismail recalls. He never recouped his money and has no idea what became of the restaurant."

-(COZ Records) "The guy was a real good talker," says Rocket

-(Cosmetics) "We were not prepared for the sharks in the beauty industry"

-(Retail stores) "The main store opened up in New Orleans, but doggone Hurricane Katrina came two months later". The shops no longer exist.

What strikes me about these examples is they're all supposedly somebody else's fault.

To my mind, what isn't being taught (both to young athletes, and to the population in general) isn't so much personal finance, but personal responsibility.

These examples mostly sound like they're about financial literacy, or at least the first thing you learn: if it sounds too good to be true, it probably is.

Individually:

Nothing is fail-proof.

People will say anything to get your money.

Business is cutthroat.

And shit happens.

I think the issue is, we're all thinking they're stupid for not realizing the risk of their investments, but maybe they do! Or maybe they recognize half or a quarter of the risk. But they don't understand the alternatives. Nobody is on the "other" side saying "invest in mutual funds!"

They probably get "exciting business opportunities" and "help your friends and family" and "spend it all on hookers and blow!" and the "exciting business opportunity" might sound like the best way to keep their fortune going compared to the other options.

I suspect that you're right and possibly because of the following reason: they've had a lifetime of outsize results. They were always the fastest, strongest, got the girl. Now comes along either a normal ETF with average returns, or the promise of outsized ones sold as insider tips between experts. It'd be tempting and in-character to swing for the fences.

I wonder how much shady side-betting these financial advisors do. It's easy to make a few hundred thousand, if you get to decide where your client invests a few million.

Reminds me of the good old Goldman Sachs, who made a killing betting _against_ their clients. https://www.theguardian.com/world/2010/apr/25/goldman-sachs-...

I've never understood this perspective.

If I buy something from Goldman then they think the price is too high and I think the price is too low. If I sell something to Goldman then they think the price is too low and I think it's too high.

If they're not willing to bet against me then they'll say something like "sorry trader was off the desk". Or if they're just less willing to bet against me then they'll say "sorry mate wide atm due to volatility".

I don’t think your perspective is very useful, because you seem to be assuming that all commercial transactions are zero-sum, since you describe both parties believing they are the only ones benefitting from the transaction.

If I buy a $5 sandwich at a deli, it’s not the case that I think they’re suckers for valuing $5 more than the sandwich, and I doubt they think I’m a sucker for the inverse. Clearly, what’s really going on is that I am hungry and cannot eat a five dollar bill, whereas the deli has way more sandwich ingredients than they need to eat themselves, and they need money for other expenses. We both benefit.

I'm more relying on my experience in trading with Goldman and other banks than I am assuming anything. I also don't see where I said anything about zero sum games.

FWIW, I read your comment the same zero-sum way. Perhaps it was because you used the term "the price" as if there's one price and any deviation from that value represents error.

If I have three shoes, I might correctly place little value on the extra, while a person with only one shoe might correctly place a lot of value on it. My selling the shoe for anything more than $0 is rational, and the other person's buying the shoe for anything less than the price of a full pair of shoes is also rational.

The shoe analogy is great.

It isn't perfect because in finance everyone's goal is to make money so it's a little more complicated, but there are similarities.

You might have a situation where ex-ante both parties are making the right decision, but one party would have rather not traded ex-post.

I might have some oil exposure so I want to sell oil futures. Maybe you think oil is going up because it's above some moving average so you show me a better market than the exchange for my size. We trade. If a minute later oil is higher than I will have wish that I waited a minute to sell and you'll be glad that you bought.

I'm not saying it's zero sum because we both willingly went into the trade and it's even possible that you'll make money on a 1 minute time frame and I'll make money on a 1 year time frame or I'll receive some other benefit.

This would happen all the time in a product that I used to trade at a non-bank financial firm. I had one way of valuing it and the banks had another way. We'd trade when we disagreed.

Except in this case it was Honest Goldman's Sound Financial Advice Inc advising you to buy, and Goldman's Shady Shell Fund Ltd selling. I don't think most clients of financial advisors check who's the counterparty in their trades.

Legally, there's very little preventing your advisor from telling you to perform trades that make you poor and the advisor's buddies rich. A lot of the aftermath of the 2008 crisis boiled down to "It might not have been moral, but it sure as heck wasn't illegal".

I don't really see the issue unless there were incentives set up to encourage this and it wasn't properly disclosed.

Usually when you trade with a bank desk you know that they're betting against you because they're the ones on the other side. If they weren't doing that then you'd always have to wait for a customer to take the opposite bet, but the market might move by the time such a customer appears.

Generally you don't want people in Honest Goldman's Sound Financial Advice Inc to know what people in Goldman's Shady Shell Fund Ltd are doing and vice-versa.

As the article tells us, a lot of athletes walk into meetings with their advisers and just get snowed by a bunch of jargon they don't really understand. They're not necessarily sophisticated investors who even know to ask these questions

I agree that there are issues with unethical financial advisors and retail customers. OP linked to an article about the wholesale "professional" market where the same rules don't and shouldn't apply. I'm saying that as someone who's been both on the bank side and the customer side.

> Legally, there's very little preventing your advisor from telling you to perform trades that make you poor and the advisor's buddies rich.

Well, other than the new Fiduciary Rule, though the Trump Administration handling of the implementation of that rule seems to have everything up in the air, from the coverage I've seen.

Never set up a discretionary account with a broker. The discretion thing means they can make decisions on what to buy and what to sell. In return, you pay commissions on the trades, plus a percent of the value of your portfolio.

Their incentive is to trade as much as possible. This is awfully tempting, even for the most ethical broker.

This is a total bummer because really, these guys would have been much better served just investing in an index fund with the schlubs than with these guys trying to sell them fancy instruments and investments in dubious businesses. Yeah, the potential return is smaller, but probably plenty.

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