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A Missed Tackle On The Bottom Line

Carl Nassib (face on) and Emmanuel Ogbah (from behind) in Cleveland Browns uniforms
Carl Nassib (right) with Cleveland Browns teammate Emmanuel Ogbah, July 2017. Photo by Erik Drost.

“Who here knows what compound interest is?”

It’s not a sentence I expected to hear on HBO’s show “Hard Knocks,” which spends each season following a specific NFL team through training camp. The 13th season, currently airing, focuses on the Cleveland Browns. Defensive end Carl Nassib posed the question about compound interest in a locker room segment where he took it upon himself to give his teammates some financial advice.

Nassib got a lot of grief for the segment after the episode aired. His grandmother reportedly objected to his colorful language, but most observers really wanted to know where he imagined he could earn 10 percent annually in bank interest alone. While Nassib claims that he was taken out of context due to editing, in the episode it sounds as if he is recommending that his teammates put all of their money in an interest-bearing bank account. He also warns them away from financial advisers, who he says will “take 1 percent of everything you’ve got” when his teammates could do just as well or better on their own.

I think Nassib sincerely wants to do well by his fellow Browns, but his advice could use some fact-checking. For the record, I am a Certified Financial Planner™ myself, and I take my fiduciary duty to my clients very seriously. I offer the following in a spirit of helpfulness, not as some sort of “gotcha.”

As many other people have already observed, and Nassib himself later acknowledged, banks are not routinely offering 10 percent interest on savings accounts these days. Most are not even offering a full 2 percent. Given today’s overall low interest rate environment, it is hard to imagine why anyone would risk putting their money to work in the stock market if they could secure a return that large through a straightforward savings account.

Nassib also enthusiastically praises the benefits of compounding over a long time horizon. He is not wrong about the upside of making long-term financial plans and giving your assets time to grow. But his explanation of compound interest leaves out an important distinction: the difference between real return and nominal return.

A real rate of return is adjusted for price changes due to inflation or other external economic factors. Nominal interest rates are not adjusted for inflation, which means they are almost always higher than real interest rates. Nassib’s example, while vivid, is oversimplified. Inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), often outpaces even the nominal interest rates that banks offer on interest-bearing accounts. This is currently the case; CPI-U was 2.9 percent for the 12 months ending July 2018. Even if it seems as though you’re earning money with nominal interest rates, you may actually lose purchasing power if inflation is greater. In order to outpace, or at least keep pace with, inflation, you must also invest in stocks that offer the opportunity to earn a real rate of return.

Players considering following Nassib’s advice should also bear the limits of Federal Deposit Insurance Corporation protections in mind. The FDIC protects depositors in the rare case where a bank fails. However, in most cases FDIC protection is limited to $250,000 per depositor, per bank, unless the deposits are spread across different ownership categories such as single, joint and trust accounts. If a player put all of his assets in one account, hoping to take advantage of the full power of compound interest, that decision might be less risky than some sorts of investment, but it would not be entirely risk-free.

As for Nassib’s dismissal of financial pros, good financial advisers do much more than teach clients about the power of compound interest. They serve as their clients’ financial quarterbacks. An adviser can help formulate and implement “big picture” planning for the long term, which goes far beyond investing. A good financial plan should incorporate income tax planning, estate planning, insurance planning, retirement planning and more. NFL players also face unique challenges because of the unusual way they receive income; rather than the biweekly paycheck many workers expect to receive all year, players collect a weekly salary over the course of a 17-week season. This means they need to be especially conscious of budgeting in order to keep their finances operating smoothly year-round.

A good adviser can help remove the emotion that threatens to undermine even the savviest investors’ long-term plans, too. Even people who know better may find it hard to resist giving in to destructive impulses when it comes to managing their own money. For example, you may want to “stop the bleeding” during a major market downturn by selling your stock positions. However, doing so only locks in what were merely unrealized losses, preventing you from participating in the market’s eventual recovery as you sit on the bench. You may also be tempted to try to time the stock market. Or you may want to grant requests for financial help from loved ones, even if those requests are more than you can practically honor. A good adviser can support you through all of these situations and more.

I don’t mean to pick on Nassib. Not all advisers are equally good at what they do, and major athletes – like successful musicians and other high-profile individuals – have reason to be wary when deciding to trust someone with their earnings. While I obviously disagree with his assertion that a financial adviser is never worthwhile, I think we advisers need to make a reasonable case for our value.

It is also great to see Nassib so passionate about his finances and encouraging his teammates to take an interest in their own. Financial literacy is critical for everyone, and understanding the basics can go a long way toward helping you find an adviser who is a good fit for your personal goals and outlook. The more you understand about your money, the more confident you can be in understanding what your financial adviser is doing and why. A good adviser will be happy to help you extend your financial education, too, rather than demanding trust in an opaque process.

Mastering concepts like compound interest, real return and more can help you to avoid needless financial missteps. Nassib mentioned in the episode that thinking of long-term consequences can curb unnecessary consumption, and gave a perfect example: He is a major Taylor Swift fan, and said he initially thought he needed to buy a Rolex before meeting her in order to impress. But thinking about how much he could earn by putting that money to work instead steered him away from that decision. In an industry where former players regularly struggle to maintain their financial footing, Nassib’s enthusiasm for thinking long-term is heartening, even if he needs to put in more time studying his financial playbook.

Carl Nassib may not be ready to be your new financial adviser, as the Browns tweeted after the “Hard Knocks” premiere. But it couldn’t hurt if everyone were just as excited about long-term financial planning.

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