Finding Your Niche Advisor

When pro athletes go bust

Multimillion-dollar contracts handed out to young athletes who often skip college or leave early to get around National Collegiate Athletic Association rules is the norm, and it has become somewhat common for many players, suddenly worth millions, to end up broke before long.

But professional athletes weren't always in big-money positions, and the phenomenon we see today is the end product of what could be termed a perfect storm.

Mike Powell | Getty Images

Here's the backstory to the financial mess that pro athletes often end up in: These gigantic player contracts wouldn't exist if the world of sports hadn't become a fantastically large business enterprise shuffling billions of dollars between professional leagues, television networks, large corporations, agents and, eventually, the players.

Read MoreRobo-advisor: The 49ers' new weapon

"It all started with the free agency of players, coupled with the proliferation of media rights," said Webster University economics professor and sports consultant Patrick Rishe.

And it was two radical businessmen who took those two opportunities to transform the world of sports. Their visions lead to the financial world that athletes live in, including its many troubles.

Turning players into stars ... and cash

At a time when television networks were hesitant to spend large sums of money on broadcasting rights, an ABC executive named Roone Arledge saw an opportunity to make professional sports an entertainment spectacle with mass appeal. In September of 1970, Arledge launched Monday Night Football—now the flagship show of professional football.

"Performance under pressure is what sports is all about" is how Arledge summed up his philosophy in a 1976 interview with Playboy. "You create an artificial situation that is fraught with incredible tension, then see how people perform. It's exciting, exhilarating."

Executive Producer Roone Arledge of ABC's Wide World of Sports, circa 1960s. (Photo by Robert Riger/Getty Images)
Robert Riger | Getty Images

Arledge's techniques helped turned professional football into America's most popular sport for the past 30 years, and the cost of broadcasting rights and advertising dollars skyrocketed.

It is estimated by Navigate Research that the National Football League earns about $5 billion annually in media and broadcasting rights alone, and a 30-second ad during last year's Super Bowl reportedly cost 4 million dollars.

And as leagues make more money, so do athletes—NFL gives about 50 percent of league revenue to its players under the terms of its latest collective bargaining agreement.

Before Mean Joe Greene drank Coke ...

The other man that changed how players profit was a corporate lawyer and avid golfer named Mark Hume McCormack.

He found himself playing alongside legendary golfer Arnold Palmer in college and saw the potential for professional players to become assets themselves. In the early 1960s, he turned Palmer, as well as fellow pro golfers Jack Nicklaus and Gary Player, into celebrity product endorsers.

Read MorePlayers fumble football windfalls

Palmer himself was using his image and stardom for more than 15 corporations. He drank Coca-Cola and drove a Lincoln; Nicklaus and Player had some of the same endorsements.

McCormack himself was surprised that he had created the concept of professional athlete endorsement deals. "The amazing thing is that of all the people in the world, I should be the one to discover this fact," he told the Pennsylvania daily paper the Reading Eagle in 1963.

From left: Mark McCormack with Arnold Palmer.
Ron Bull | Toronto Star | Getty Images

Arledge's and McCormack's ideas sparked the beginning of millions of dollars being funneled to professional athletes in endorsement deals and contracts. It also gave rise to super-agents, like Leigh Steinberg in the mid-1970s, who secured these deals.

Men like Steinberg—the inspiration for the 1996 film character Jerry Maguire, played by Tom Cruise—were part of what could be considered a golden age of sports, with all parties cashing in.

Leigh Steinberg and Tony Eason
Frank O'Brien | The Boston Globe | Getty Images

Representing the defense, and offense

With the advent of big contracts for players came the potential for players to fall victim to fraudulent and questionable representation.

A feeding frenzy among agents grew, and aggressive and sometimes illegal tactics by agents and managers to sign players started to surface.

Read MoreNew York Knick invests in tech

It all came to light in the late 1980s with a scandal involving two agents: Norby Walters and Lloyd Bloom. Walter and Bloom formed an agency called World Sports and Entertainment in 1984, and to get ahead of other agents, they tried all sorts of tactics to get around NCAA rules that barred active college players from signing deals.

They used such techniques as post-dating contracts for players to sign and offered them trips and luxury gifts—all violations of NCAA rules.

The Walters and Bloom scheme began to crumble when the duo started to sue players backing out of contracts. At around the same time, the NCAA and federal officials began investigating the agency's practices.

Norby Walters
Victor Spinelli | WireImage | Getty images

Walters and Bloom were charged with conspiracy, extortion and mail fraud by a federal grand jury in 1988. There were also allegations of violent threats made to players who tried to back out of contracts. The government claimed that Walters used the name of Colombo crime-family member Michael Franzese—who was a silent partner—to intimidate players. Franzese was granted immunity during the trial and has since left the crime family. Today he is an author and motivational speaker.

Ultimately, Walters' and Bloom's convictions were appealed and overturned.

Walters, now in his eighties, never returned to the world of sports and now heads the annual Night of 100 Stars—an event held simultaneously as the Oscars. Bloom was found shot dead in his Malibu home in 1993.

A wealth of talent

Investment tips from a former mob boss
Investment tips from a former mob boss

Representation is just the first step for players in securing big money. Financial advisors and wealth managers are needed to keep that money flowing. For pro athletes, this can be a financial make-or-break once they get on the field—and then off it for good.

The NFL Players Association established a financial advisor program a decade ago. The program has its own advisor accreditation requirements in order to offer players the chance to steer away from "poor financial advice, but also from outright fraud." Advisors who want to be listed pay an application and membership fee of $2,500 (the fees offset the cost of the program's operation). The NFL Players Association makes clear that it does not endorse the financial advisors on the program roster and is not responsible for the "skill, honesty, or competence" of any persons involved.

Read MoreAdvisors feel pressure to specialize

But even with good intentions, things still go wrong.

In 2008, hedge fund manager Kirk Wright committed suicide in an Atlanta jail cell. He was found guilty of fraud and laundering $150 million dollars' worth of client's money—several were former NFL players.

Two years earlier, while Wright was awaiting trial, the former players decided to sue both the NFL and the Players Association. The former players accused the organizations of allowing Wright on the list of approved financial advisors, despite the fact that he had liens filed against him and without performing background checks.

In 2006, Jim Evangelista, a lawyer representing the former players, explained his clients' positions to CNBC's Melissa Lee.

Former NFL players fraud suit
Former NFL players fraud suit

In 2010 a federal appeals court sided with the league and player's union.

The NCAA and professional leagues have continued to offer some level of financial literacy, education and advisor programs. But as in any financial situation, players are left to ensure that they protect their own money and assets.

"A lot of athletes didn't have a financial guide growing up," said Armand Del Medico, a senior vice president and wealth advisor at UBS Financial Services who works with NBA players. He says that pro athletes' success is really contingent on whom they listen to and who manages their money. That makes finding someone to trust the most important and difficult financial decision they have to make.

Holding on to star power

For many athletes, there is often no second career that allows them to maintain their lavish lifestyles. And unlike the old days, when playing was often a part-time job, most athletes today never get a true off season.

"The hard thing is that contemporary sports doesn't really have the same off season as it used to," said Steinberg, who now owns and operates the Steinberg Sports and Entertainment agency. He said that when not on the field, athletes are continuously involved in off-season training and "are not sitting around for long periods of time."

Read MoreAvoiding thorny asset issues in divorce

Throughout his career, Steinberg has found four main missteps made by professional athletes:

  • Being the primary or secondary support for a large group of friends and family.
  • Getting divorced.
  • Making disastrous investments.
  • Lacking support in dealing with taxes and IRS interaction.

Steinberg found himself in his own financial trouble. Here is an interview with Steinberg in 2012, shortly after he declared bankruptcy.

Steinberg's points are seen in the sensational stories reported today, like retired Red Sox pitcher Curt Schilling, who infamously lost, as he said himself, "tens of millions" in his video game venture.

Moves like these are common because, as Del Medico put it, player's who have retired try to maintain their "celebrity, high-profile" status and attempt that through high-risk investments.

Del Medico tries to make players understand that they need a retirement plan on "steroids"—going from extremely aggressive to non-aggressive fast. It's the best way for them to maintain a "cash flow that will last for the next 40 years."

Perhaps the best that pro athletes and college players signing big contracts can do is to look to past players' troubles and apply the lessons learned in order to proactively protect themselves and their own assets.

Read MoreTennis players cash in

Financial problems among athletes is not new; it has just taken new form with more money and higher stakes.

From the beginning, poor choices and investments weren't unheard of: Legendary baseball shortstop Honus Wagner bankrolled the "Wagner Brothers' Circus" in the early 20th century. Not surprisingly, it was a flop.