University of Arizona Wildcats guard Joe McLean plays defensively against UCLA Bruins guard Kevin Dempsey during the January 7, 1993 Pacific-10 conference game.
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Like many former NCAA college basketball players, Joe McLean’s dream was to play in the NBA.
The 6’6 “forward has played for four years for the famous Arizona Wildcats University coach Lut Olsen. He finished in the final four in 1994 and earned an average of about 10 points per game in his final season. Following the camp before giving up his NBA dream.
“I was fine, but the others were really good,” he said.
McLean finally got his call as a financial coach and advisor to professional athletes who have a notoriously difficult time managing their fortunes. According to a 2009 Sports Illustrated survey, 60% of NBA players went bankrupt within five years of leaving the game at that time.
McLean, now the managing partner of San Ramon of California-based Intersect Capital – ranked 94thM CNBC’s Top 100 Financial Advisors list in 2021 – thinks these numbers are exaggerated.
However, he also believes that the results of the survey bring a much-needed awareness of the very real challenges facing professional athletes to deal with sudden wealth.
CNBC spoke with McLean about many of those challenges.
CNBC: Why do so many professional athletes who make so much money get into financial trouble?
Joe McLean: Anyone who comes into contingency has the risk of disaster and burns. Age plays with it. The younger you are, the more likely you are to have a fakehead. We’re working with young people who don’t usually look to the past next Friday, and we’re talking about a 20-year-old earning money that will last for generations if it has the right plans.
The biggest problem is that the qualities that make someone a great athlete or a successful entrepreneur are the qualities that you don’t need to be a successful investor. The drive to win and the desire to take risks and place bets on yourself do not transfer well to money management.
CNBC: What are the challenges young athletes face?
JM: Most people survive and spend and save the rest of their income. With athletes, you need more intensive financial planning because you are dealing with a five- to 10-year income stream that can last a lifetime. I tell clients to compete in court, not in the locker room.
There is an overspending dynamic. At a young age, lifestyle can begin to make decisions for you. A $ 50,000 watch could be worth half a million dollars decades ago today.
CNBC: What is your most important advice for young professional athlete clients?
JM: I tell them to be patient when it comes to money. My clients need to save at least 40% of every dollar they earn on their first contract; 60% of their second contract; And 80% of their third. If someone doesn’t take that idea, the relationship probably won’t work.
I’m not there to tell people what to do but to empower them to get positive results. The sooner they adopt an organized process of saving, the better.
CNBC: How much advice do you have about clients’ costs?
JM: For most of our athlete clients, we are their personal chief financial officer. We help them set up their first LLC or S Corporation as well as make big purchases like a new home and car. We all need to learn how to manage a home for the first time. Understanding things like utilities, property maintenance and tax costs sets the client up for financial success. One day they will pass on the knowledge to the next generation.
CNBC: What is your investment method for all accumulated savings?
JM: We start each investment conversation by talking about three buckets: safety and security buckets; Bucket of growth; And dream / entrepreneur bucket.
In the first, we recommend keeping enough cash for at least one year of life insurance costs, wills and trusts and possibly all fixed and variable costs, including their first home. We then started filling the growing bucket.
Early in a client’s career we invest in a combination of low-cost, tax-managed equity and fixed-income assets. We start investing up to 15% of our portfolio in income-generating real estate but until the client has some investment experience, we keep them very liquid.
When these two buckets are full, we set aside 5% to 10% for the dream / entrepreneur bucket. It can be invested in private equity, venture capital and small business ventures. This may include buying a second car or home of their choice. Most people want to fill the dream bucket first, but this approach allows clients to take more risks over time in that third bucket than they did the other two first.
CNBC: What would you say to one of the 60 athletes drafted by the NBA team next month?
JM: These players are fulfilling their dreams in the NCAA Tournament and some will have the opportunity to play outside of college. If you look at a draft, you will see a lot of people celebrating with athletes. Many of them have your best interests at heart but many of them expect you to help them financially.
I write a letter on social media before each draft so that athletes should think about going through the process. This includes things like don’t spend money before you earn it. Respect your mom with a financial plan, not just a new home. Empower your friends and family to get a job, not give them a day off. Seek the advice of experts and those who are there.
They have to be patient with money. We all do knockhead things. This is why it is so important to have a mechanism to get on track early.
CNBC: How do you persuade young people to be disciplined in that situation?
JM: I think talking about the reasons why professional athletes stay rich seems more helpful than the horror stories about why they broke up. There are many ways to lose money and no justice. We all do knockhead things. This is why it is so important to have a mechanism to get on track early.
CNBC: What other tips are coming in for big bucks for young athletes?
JM: Learn to play golf. It allows you to spend two to four hours with people learning about them and from them. Golf is a humble sport and humility is the new smart.
In minor league baseball and hockey, they put you on the bus and the bus makes you humble. I think there is a connection between traveling by bus and being successful when you sign a big pro deal. The slower the money comes to someone, the longer it will last. Be patient.