Don’t Ignore the Importance of Human Capital!

Recently I was revisiting a very interesting parallel drawn between human capital and financial capital as they both relate to building a portfolio. In 1980, R.A. Campbell developed a framework for life insurance that involves the trade-off between risky vs. non-risky assets. The parallel when applied to how financial wealth is derived is actually pretty interesting.

Given that…

Human Capital + Financial Capital = Total Financial Wealth

If the average individual will have about 40 years to monetize the value of their human capital (e.g. earn a living) AND some of those earnings will be translated into financial capital (e.g. stocks, bonds or other investments), then investors should be focused on building a wealth creation plan that will maximize those two components at their peaks. It is likely you have been told over your life about “financial capital” but how well have you focused on human capital, or better yet, you have probably ignored the value of human capital–the power to earn.

Imagine the following is true:

human capital

If the above graph is of a typical working person earning $35,000 per year, let’s do some quick math (thanks MS Excel!):

  • Over the next 40 years, with no pay raises and inflation (of 3%), cumulative earnings are $2.99 million, or
  • Over the next 40 years, with 1% annual pay raises every 2 years and inflation (of 3%), cumulative earnings are $3.38 million, or
  • Over the next 40 years, with 1% annual pay raises every year and inflation (of 3%), cumulative earnings are $3.85 million

So let’s just take the average of those 3 scenarios (assuming most Americans fall into at least one of those categories) and earn about $3.41 million dollars over a 40 year career. Realizing that represents a gross number, without taxes and living expenses, what amount of financial capital could be achieved by just taking 10% of that total human capital?

(Just a bit more math…)

  • Saving 10% which is $341,000, is just about $327 per pay period (assuming a pay schedule of twice a month) over 40 years. Assuming the rate of return averages 7.5%, the retirement nest egg would be $2,159,566!

So why aren’t investors placing higher value on their human capital in order to create more financial wealth? Here’s three reasons I think this is not happening:

There’s too much focus on the wrong thing…

Ashvin Chhabra, chief investment officer at Merrill Lynch, says “If the markets don’t really care about you, as surely they do not, then why should you spend all your time and effort trying to beat them?” This is such a good point. In his book, he expands on a concept called the “Wealth Allocation Framework” that is much more about capital allocation across a spectrum of goals as well as asset classes. Too often, the focus is myopically on investment returns when an investment portfolio only represents a “portion” of one’s financial wealth. Other things to consider are personal use assets like your home, and the most powerful of all (at least until later in life)–human capital.

Investing has become far too emotional, and not logical enough…

I’ve seen a lot of instances where the emotions of investing take over sound reasoning. Many investors are doomed to failing at leveraging their human capital to achieve maximum financial wealth because of mistakes made during the investment cycle. So many times good discipline is overridden by irrational behavior. This is why, often times, it makes more sense to hire someone to help you make decisions. As Carl Richards puts it, financial advisors are there to “keep you from doing something stupid”. I think this is a valid point, because human capital cannot be replaced as time passes, only financial capital can.

Ignorance…maybe? Or just not informed…

Unfortunately, this type of thinking is not widely known or discussed. I actually learned it during my master’s program at Creighton. So although somewhat intuitive, I’d never explored this topic in any depth (and I’ve been in the industry for almost two decades!) I believe the takeaway is that, financial advisors have to start discussing the importance of human capital and its relation to financial wealth. They also must begin to start practicing it by considering it in client wealth allocation models.

When it is all said and done, time will have passed and your power to earn will have diminished. The question will be: Did you ignore the value of human capital in your overall financial plan?

Could the NFLPA be Doing More to Prevent Fraud Among Athletes?

Is it possible that the NFLPA can be doing more to prevent fraud to their athletes?

My last article covered some specific things that athlete-clients can look for when seeking to hire a financial professional.  Having had some conversations with former players, journalists and a league insider in the time since, I decided to continue the theme and focus on some things that the NFL Player’s Association (NFLPA) could do to prevent some of the instances of fraud that are happening to athletes.  Now I will say, my tone may seem harsh and I haven’t sought comment by them on this subject, but these are things of which they are well aware.  So the question is naturally:  “With a multi-billion dollar per year enterprise like the NFL, couldn’t the union be doing more to help prevent fraud against athletes?” My opinion is simply yes,  and here’s why I think they could (and should) be doing more.

Credibility–That’s the Problem

In theory, most advisors want to work with affluent clients like athletes and other high-net worth individuals. But in a survey taken not so long ago, the NFLPA saw a decline in the number of financial advisers applying for certification. Very possibly, this could be tied to the trend of overall decline in the industry and aging demographics, or something else.  Although it is possible, it doesn’t seem likely, having witnessed these trends (first-hand) in financial services for nearly two decades.  Therefore, I have to ask the question: “why wouldn’t advisors want to join the NFLPA program and what could be some of the reasons?”  On one hand, you could argue that older advisors leaving the industry makes room for successions and younger advisors to enter, thereby creating more “room at the table” for advisors looking to work with athletes in the NFL.  Also consider, financial advisors are looking for good, long-term clients.  At the end of the day, advisors have to eat also, and it doesn’t make for a good use of time to market in a place you are not welcomed.  So you have to wonder, how has the NFLPA prepared athletes to interact with financial advisors?  Neil Stratton, a league insider, publishes a pretty informative newsletter that revealed the following last November in a NFLPA event designed to address “concerns of members of its financial advisor program”.
He mentioned the following from various participants in the webinar:
“…unfortunately most players do not care whether or not an advisor is registered with the NFLPA.  The union is not going to help [advisors] meet players in any way, shape or form”.
“…as far as I am concerned….the FA program is a colossal waste of time and money…I have wasted plenty of time and money traveling to their symposiums and have never left one wiser.”
“I just didn’t really get a sense from the webinar of anything specific that will be done differently or additionally to promote (a player-centric approach).”
Stratton concludes by asking the question:  “if the NFLPA is serious about putting competent financial counsel with its players, and its vetting members of the program sufficiently, why aren’t members of the program invited to the annual Rookie Premiere and given audience with the players?”  I agree.  At some point, don’t you have to justify the annual dues and non-refundable fees you require advisors to pay (“to play”) and use that to make the program better?  Wouldn’t this attract competent advisors into the program and help weed out the charlatans? Is it fair to say that an organization with a payroll far in excess of $15 million per year which includes a handful of lawyers should be able to create a vetting process to keep advisors that lie about their credentials out of the program?

Where’s the Accountability?

As cited several times in this article, the NFLPA’s Rules and Regulations for financial advisors punts most of the oversight responsibility back to the advisor or the firm he or she is working for.   A SEC No action Letter from 2002, deemed the NFLPA’s program as “not giving advice” which falls under much less onerous rules (as veteran financial advisors well know).  Yet it acts as the “gatekeeper” of sorts to allow financial advisors that do “give advice” access to players.  Was the program designed to escape SEC oversight and just provide access to players without any further accountability?  On their website, the NFLPA publishes the requirements for certification in the Regulations and Code of Conduct.  Let’s look at a sampling of the language.

Obligations of the Applicant FirmThis clause basically shifts the responsibility of oversight back to the applying firm based on the regulatory authority’s requirement.  Couldn’t the NFLPA just develop more stringent oversight and rules in the interest of its own players realizing that they are often targets because of the program’s “relaxed” standards?

Professional Qualifications– This clause lists all of the professional qualifications for advisers entering the program.  But who checks on these qualifications?  A more thorough check with state securities regulators would have revealed that Mr. Ash Narayan was not a CPA.

A Registered Player Financial Advisor mustThis clause is really alarming.  So in the case of Mark Sanchez, what was the NFLPA waiting on to realize his investments were losing money?  Weren’t they looking at the statements per this clause? Or was the advisor just not submitting the statements?  Either way, this should have been a red flag to the NFLPA.

Like a began this article with saying, I didn’t reach out to the NFLPA for any comments, so maybe there is another side to this story. But in my years of dealing with non-athlete clients, I’ve noticed something that really bothers me.  Very crucial, accessible information is just not being shared, and you have to ask the question “why”.  Thanks to individuals like Marcus Ogden and Bart Scott, players are being educated on the right things to do, but there is a big hole and we need more shovels. Good financial advisors are hard-working individuals looking to help others reach their goals and dreams.  It seems at least for now, that the NFLPA is just content with “sitting on the sidelines” instead of partnering with us to make things better.