Former Major League All-Star Sues Advisor (Follow-Up)

Yesterday's post on Denny Neagle's financial woes generated some interesting comments on the need for personal responsibility in the personal finance world.  One point personal finance bloggers understand well is that nobody knows your financial situation better than you do.  Up to a certain point, everybody should know basic investment and financial planning concepts - they need to take some responsibility for financial decisions.  This definitely includes the cost of different approaches to managing assets.

Having said this, I believe I am probably not as hard-nosed as some of the commentators.  I understand exactly what they are saying when they argue that it was Neagle's fault in being taken advantage of; but, still, I try to put myself in some of these athlete's shoes.  At the time they sign professional contracts, they are young and naive.  Supposedly they have agents working on their behalf = there may be a whole back story here that hasn't come out.  Where was the agent who undoubtedly received big bucks as his representative?  I believe that major league baseball (maybe the union) has a list of approved agents and possibly approved asset/wealth managers.

Somewhere along the line, I believe, these young people signing these massive contracts should be exposed to the various views on how to invest.  At the table should be a rep explaining that many very astute market participants (including Warren Buffett, John Bogle, and Burton Malkiel) believe a large portion of assets would be best invested in low-cost, well-diversified, index funds structured with an allocation that reflects risk tolerance.  In the case of athletes, the asset allocation would take into account that there is no need to take an inordinate amount of risk given the size of the contracts.

Then, if the athlete, on the advice of his agent, goes the limited partnership/alternative investments/ high priced hedge fund route,  I join others, wish him/her the best, and have no sympathy if he/she ends up like Neagle.

To me, all of this points to the need for strong financial literacy programs in high school.  The athletes who blow enormous wealth get the publicity.  The average person ripped off by the financial services industry goes unnoticed.

Former Major League All-Star Sues Advisor

Denny Neagle, 2-time all star pitcher, and his ex - wife are suing their financial advisor who put them in hedge funds, private equity funds, and alternative investments where they have experienced large losses and today cannot access their funds.  As Larry Swedroe points out in  "Invest Smarter Than an MLB Star" posted at Arianna Capital's site, "Working with an advisor you can trust is important but shouldn't replace your own education on financial matters."

Neagle signed for $51 million in 2000.  Swedroe lists a number of other big time athletes who blew their fortunes because they were financially illiterate.  Here's the rub, at least to me - it is not difficult to gain financial knowledge.  It's a hell of a lot easier than walking to the mound in Yankee Stadium in front of 57,000 screaming maniacs with the bases loaded in the bottom of the ninth.

For example, these athletes could have saved millions by spending a weekend reading Millionaire Teacher (available at $11.49 used on Amazon) or a similar book.  The advisor  wouldn't tell them this. Quite the opposite - he would emphasize how difficult investment management is and, in the process, build up his importance and rationale for a huge fee.

Most people reading these books are learning how to build their wealth.  These books are also valuable, however, for those trying to understand how to manage risk and preserve wealth--which is a big part of the game.  It's a mistake to automatically assume that, because you are well off and have a high-priced adviser, you don't need this information.

My question, though, has to be on what the advisor's motives were.  Advisors know that accounts of this size don't come along often and are literally a gold mine.  There never is a need to try to hit the ball in the upper deck (to use a baseball pun), but especially with an account of this size.  Was the advisor that greedy?  I'm not naive - I know about Madoff et al. - but it does puzzle me!

Swedroe also points out that financial illiteracy is not just a problem for high-priced athletes.  A large percentage of adults admit to pretty much being clueless when it comes to their investments.

The sad part, IMHO, is that it isn't difficult to remedy a large part of the problem.  But until steps are taken, stories like the Neagles' will, unfortunately, be all too common.