Jordan Waxman, ranked #42 in Forbes’ list of America’s Top Wealth Advisors, is Managing Partner of HSW AdvisorsÂ ($2.5 billion in assets under management) as well as managing partner for its subset division, HighTowerÂ Sports And Entertainment.
I spoke with Waxman about managing theÂ finances of athletes and entertainers, including ways to mitigate their tax burdens,Â strategies for planning an athlete’s long retirement and how he is able to get through to young athletesÂ before they buy carsÂ or houses for their family and friends.
Karl Kaufman:Â How do you set up a portfolio for an athlete?
Jordan Waxman:Â It’s a modular approachÂ â€”Â we manage clients in all phases from first contract all the way to retirement.
The first thing we talk about is that they’re likely to make their fortune primarily through income, not equity. Compared to an entrepreneur who has an equity stake in a company, has very little income and often very little liquidity, the athlete has all income and all liquidity. Thus, they are subjected to multiple levels of taxation.
The most important thing we can do is point out the different ways they’re taxed. We’ve developed a system for athletes to manage their wealth through the arc of their career.Â With rookies, we discuss budgeting and playing every game as if it’s their last. Their assets have to be in protection mode.
Further along, as they get bigger contracts, they can afford to take more investment risk. They then have to protect other things, like their reputation and their capital andÂ getting prenuptial agreements and different forms of insurance.
As they reach their later stages, they can take even more investment risk and focus on maximizing their retirement income. In retirement, it’s a different calculus altogether. It’s more about covering their lifestyle needs and taking risks beyond that.
Kaufman:Â With athletes, unlike other professions, careers are very short and retirement lastsÂ much longer than the average person. How do you encourage an athlete toÂ protect their money so that they can live offÂ their earnings for 40 or 50 years?
Waxman:Â Our goal is to be able to help the athlete from their 20s to their 80s. There are different instruments that are valuable for that kind of longevity.
First, they have to protect their earnings power and so they need disability insurance. The second thing is retirement money, so they need to use every form of tax deferral possible.
Clients who are just starting to earn need to force themselves to pay for retirement â€” maxing out retirement plans, universal or whole life insurance policies, potentially annuities. If they have young children, they may be good candidates for 529 plans because that’s forced savings for a potential need down the roadÂ and they’ll get tax-free compounding of that money.
Everything that the government gives you an interest-free loan on, every type of retirement account or insurance policy, we avail ourselves of those. For higher earners, we even use private placement life insurance, where we put tax-insensitive parts of the investment portfolio inside tax wrappers that are effectively the cash value of a life insurance policy.
We don’t tend to use retail policies for those because they’re expensive and limited in their scope. We have a client who’s making $14 million a year and we’re going to take 20 – 30% of his portfolio andÂ putÂ it in alternative investments, some of which are tax-insensitive, like credit funds and hedge funds.
If we’re going to own those for 20 or 30 years until the client is in his 50s, we can have them in a tax-free wrapper. When that client is in his 50s and wants to draw $1 million a year for life as a loan against the policy, it’s easy to administer that.
Kaufman:Â How does managing an entertainer’s assets compare with managingÂ an athlete’s?
Waxman:Â An athlete’s career earnings are salary no matter which way you look at itÂ â€”Â they’re not licensingÂ their name to the Carolina Panthers, they’re playing for the Carolina Panthers. Endorsement income is differentâ€” you can structure that as a corporation that’s providing services, like lending your image or name,Â attending various events and so on. You can then take various expenses against that and involve family members.
It’s similar for entertainers. If they’re actingÂ in a movie or appearing on television, that’s salary. They can license their name or image to various activities and createÂ production companies in order to shelter income.
We have a well known comedic actor who is a phenomenal writer and is creating a bunch of content. So now it’s not just acting and getting paid for a movie; we can be creative about the production company that we set up and how we value that content before itÂ brings in income. We value that at a discount because it’s really not a marketable business, there are no profits in it. We can use expenses and tax mitigation strategies to offset some of the potential future earnings in that entity.
Our entertainment clients tend to have good tax and legal teams and if they don’t, we put the teams together for them. They’re by and large moving away from business managers, although some still have them andÂ good managers see opportunities for these clients that they don’t see on their own.
Kaufman:Â There are so many stories aboutÂ celebrities like Johnny Depp and Nicolas Cage squandering away fortunes.Â Do you use cautionary tales like these to motivate your clients?
Waxman:Â From time to time. Young clients who are first getting into professional sports often want to buy Lamborghinis or Bentleys or houses for their family and friends.Â We say, “these are your earnings, this is how much your agent gets, this is how much the federal government gets, this is how much the state government gets, these are your living expenses. Here’s what’s left. How many people do you want to take care of?”
Once we do that, they usually say, “Yeah, that’s probably not a good idea.”
If they still want to buy stuff, I’ll tell them, “let’s be smart about this. Let’s play defense here. If you play offense on the field, we need to play defense.” There are plenty of people who’ve bought million dollar houses for their families and forgot to fill out gift tax returns. They get a tax bill years later because the IRSÂ reads their story somewhere.
Kaufman:Â Do you think the NFL and other leagues do enough to educate their rookies about money management once they’ve been drafted and get their first contract?
Waxman:Â Some of them are trying. I’d say the NFL raised its standards for the NFLPA Advisor Program this year. They require all their advisors to have either a CFP or a CFA designation. They’ve bumped up the amount that goes into various retirement plans. They have a very generous benefits package, but it’s really up to the teams to bring experts into the locker room.
The other sports do not have advisor requirements or programs. They need to go farther and set standards for advice.
Waxman:Â Michael Jordan, Magic Johnson, LeBron JamesÂ â€”Â those guys made $25-30 million a year for many years. That’s a different caliber;Â not every athlete is going to be a centimillionaire. I’m not sure you can emulate these really wealthy guys.
Most ofÂ my clients don’t have wills or trusts or powers of attorney or health care proxies when they come to us. I don’t necessarily point to the ones who’ve struck it rich in tequila or movie theaters. I don’t think it’s relevant to them. They want to know, “how do I maximize what I have?”
I tell them, “it’s not what you make, it’s what you keep that matters.” For athletes and entertainers to get wealthy,Â they need to think like entrepreneurs. We want to turn our clients into stewards of capital.