'There are so many ways to lose money.' Advice for college athletes from former basketball player turned financial advisor

Like many former NCAA college basketball players, Joe McLean had dreams of playing in the NBA.

The 6’6″ forward played four years for celebrated coach Lute Olsen on the University of Arizona Wildcats. He made it to the Final Four in 1994 and averaged nearly 10 points per game in his last season. McLean played professional basketball in Europe for three years, followed by a training camp with the Sacramento Kings before he gave up on his NBA dream.

“I was good, but others were really good,” he said.

McLean eventually found his calling as a financial coach and advisor to professional athletes, who have a notoriously tough time managing their good fortune. According to an oft-cited Sports Illustrated survey in 2009, 60% of NBA players were going bankrupt within five years of leaving the game at that time.

McLean, who is now managing partner for San Ramon, California-based Intersect Capital — ranked 94^th on the CNBC Top 100 Financial Advisors list in 2021 — thinks those numbers are exaggerated.

But he also believes that the survey results brought a much-needed awareness to the very real challenges that pro athletes face coping with sudden wealth.

CNBC spoke with McLean about those many challenges.

CNBC: Why do so many professional athletes who earn so much money end up in financial difficulties?

Joe McLean: With anyone who comes into sudden wealth, there is a risk of crash and burn. Age plays into it. The younger you are, the greater the likelihood that you’re a knucklehead. We’re working with young people who typically don’t look past next Friday and we’re talking about a 20-year-old making money that if proper planning is in place will last for generations.

The biggest problem is that the traits that make someone a great athlete or a successful entrepreneur are not the same traits you need to be a successful investor. The drive to win and the willingness to take risks and bet on yourself doesn’t transfer well to managing money.

CNBC: What are the key challenges that young athletes face?

JM: Most people live and spend and save the remainder of their income. With athletes, you need more intensive financial planning because you’re working with a five-to-10-year income stream that may have to last a lifetime. I tell clients to compete on the court, not in the locker room.

There is an overspending dynamic. At an early age, lifestyle can start making decisions for you. A $50,000 watch today could have been worth half a million dollars a couple of decades from now.

CNBC: What is the most important piece of advice you have for young professional athlete clients?

JM: I tell them to be patient with the money coming in. My clients have to save a minimum of 40% of every dollar they earn in their first contract; 60% of their second contract; and 80% of their third. If someone doesn’t buy into that idea, then the relationship probably won’t work.

I’m not there to tell people what to do but to empower them to have positive outcomes. The sooner they adopt an organized process of saving, the better off they will be.

CNBC: How much advice do you provide clients on their spending?

JM: For most of our athlete clients, we are their personal chief financial officer. We help with paying bills and making major purchases such as a new home and cars along with setting up their first LLC or S Corp. We all need to learn how to manage a home for the first time. Understanding what things like utilities, property upkeep and taxes cost sets the client up for financial success. Some day they will pass the knowledge on to the next generation.

CNBC: What is your investing approach for all the savings that accumulate?

JM: We begin every investing conversation talking about three buckets: the safety and security bucket; the growth bucket; and the dream/entrepreneurial bucket.

In the first, we recommend putting enough cash to cover at least a year of all fixed and variable costs, including the costs of life insurance, a will and trust, and possibly their first home. We then begin filling the growth bucket.

Early in a client’s career we invest in a mixture of low-cost, tax-managed equities and fixed income assets. We also begin investing up to 15% of the portfolio in income-producing real estate but until the client has some experience investing, we keep them very liquid.

When those two buckets are filled, we leave 5% to 10% of the money for the dream/entrepreneurial bucket. This can be invested in private equity, venture capital, and small business ventures. It might also include buying a second car or home they want. Most people want to fill the dream bucket first, but this approach allows clients to take more risk over time in that third bucket knowing that they have filled the other two first.

CNBC: What would you tell one of the 60 athletes who will be drafted by an NBA team next month?

JM: These players are living out their dreams in the NCAA tournament and some will have the opportunity to play beyond college. If you watch a draft, you’ll see a lot of people celebrating along with the athletes. Many of them have your best interests at heart but many of them also have expectations that you’ll help them financially.

I write a letter on social media before every draft with ideas that athletes should think about going into the process. They include things like don’t spend money before you earn it. Honor your mother with a financial plan not just a new house. Empower your friends and family to get jobs, don’t give them one. Seek advice from experts and people who have been there.

They need to be patient with the money. We all do knucklehead things. That’s why it’s so important to have a process to get on track early.

CNBC: How do you convince young people to be disciplined in that situation?

JM: I think it’s more helpful to talk about reasons why professional athletes remain wealthy rather than horror stories about why they went broke. There are so many ways to lose money and there’s no judgment. We all do knucklehead things. That’s why it’s so important to have a process to get on track early.

CNBC: Any other tips for young athletes coming into big money?

JM: Learn to play golf. It allows you to spend two to four hours with people to learn about them and from them. Golf is a humbling sport and humility is the new smart.

In minor league baseball and hockey, they put you on buses and buses humble you. I think there’s a correlation between travelling on buses and being successful when you sign a big pro contract. The slower that money comes to someone, the longer it will last. Be patient.