"What Michael Carter-Williams’s Trust Fund Can Teach Us About Financial Planning In The NBA"
Philadelphia 76ers point guard Michael Carter-Williams went public earlier this month with the fact that he will be keeping all of the earnings from his rookie contract in a trust that he can’t access for three years. The 22-year-old will still make money on endorsements — he’s got one from Nike and another from Panini trading cards — but the actual salary won’t come to him until he’s 25.
“You are using your head and your heart,” CNN host Chris Cuomo told Carter-Williams in an a praise-filled interview on Wednesday. Cuomo pointed to what makes Carter-Williams saving scheme so impressive: A whopping 60 percent of NBA players declare bankruptcy within five years of leaving the league
So what makes Carter-Williams different from the 60 percent? His mom.
“My mom actually, she does this for a living,” Carter-Williams told CNN. “She has her own company called Carter and Tracy Incorporated, and she helps young athletes get started, whether it’s dealing with housing or dealing with their money, and I know she always has best interests in me, not only because I’m her son, but because of what she does for her job.”
Few athletes are lucky enough to have the support structure Carter-Williams has. Many NBA players are propelled into the profession as young as 19 years old, after focusing all their energy on the sport they play, and without financially-savvy parents to help them make sound decisions. They’re handed a massive paycheck and none of the financial planning chops to go along with it.
This sudden wealth, similar to a lottery win, can lead to heartbreaking stories. Just look at another point guard drafted by the 76ers, Allen Iverson, who entered the NBA at 21 in 1996. After years of lavish spending, Iverson’s become a spectacle of financial ruin. His bank account was garnished last year to pay off a massive jewelry bill. It’s similar to the story of now-famous Charles Barkley, who said after four years in the league he was broke. He’d given away all of his earnings to friends and relatives, citing “the burden of forgetting where I came from.”
And it’s not just excessive spending that can get a player in trouble; last year, reports emerged that several NBA players had fallen victim to a ponzi scheme, handing over millions to an investment company that had misled them. Indeed, suddenly-rich players are obvious targets for swindling financial advisers, so it’s not easy for an athlete to go out and find one on his or her own.
Lacking financial literacy is particularly dangerous for athletes, whose skill-sets can be limited beyond their sport. Players leave the league with little more than basketball-related careers to fall back on. Some go on to coach or sportscast, but the number of jobs to the number of players doesn’t add up, and it’s not what every player wants to do anyway.
The NBA has instituted some measures to combat the poor financial fluency of its athletes. The league holds a three-day Rookie Transition Program that includes some financial literacy discussions. It also caps lump-sum payments to players at 80 percent of total salary, while the rest needs to be doled out over the year. And thanks to the agreement hammered out last year between the players’ union and the league, all players are now required to set up retirement annuities that take one percent of their “basketball related earnings” each year. The agreement also established a savings account of 5 to 10 percent of salary. Players are automatically opted into that program, but can choose to opt out.
But these measures are more dictatorial than empowering, and there is certainly more that could be done. Now that all NBA players are required to be one year out of high school, and since most spend that year playing college ball in the NCAA, an easy proposal is that the NCAA could actually mandate its athletes to take financial planning courses. Currently, the NCAA strongly encourages athletes to set up a bank account, but has no requirement that they actually learn the skills to handle their own money (a cruel twist, since NCAA athletes don’t actually earn money for the lucrative games they play).
The NBA, too, could create compulsory financial literacy courses that aren’t simply jammed into a three-day session. Right now, financial literacy courses are offered up by the players’ association — and some coaches have also tried to urge their players to think critically about their finances — but there’s no long-term league initiative, as there is in the NBA’s football counterpart. The NFL has its own National Football League Financial Education Program (FEP), offering financial literacy assistance not just for rookies, but for players throughout their careers in the league and even after they retire. That program is new, but if it is successful it reducing the number of bankruptcies among NFL players, it could provide clues to how the NBA can address its problem too.