Foul! For every sports star who develops a successful investment strategy, the field is strewn those who have lost millions.
Cristiano Ronaldo, the Portuguese soccer megastar who plays for Club Real Madrid in Spain, is getting a red card from financial experts for giving risky financial advice to millions of fans.
The world of athlete endorsements is a multi-billion dollar industry. Michael Jordan has his Air Jordans. Serena Williams has her Beats by Dre headphones. And Caitlyn Jenner, formerly the runner Bruce, had her Wheaties. But you shouldn’t trust everything your favorite sports star gets involved with.
That’s particularly true when it comes to investment advice.
Ronaldo recently told his 59 million Twitter followers he was really happy with his partnership with an investment firm called Exness, and promoted it for its “highest level of services,” according to reports.
But what is Exness?
Exness, an online broker based on the island of Cypress, reportedly specializes in something called contracts for difference, or CFDs, which are derivatives.
The average investor has no business investing in derivatives, experts say, as they are based on speculation
Additionally, Exness reportedly allows investors to leverage their accounts, which in this case means they can borrow up to 500 times what they have on deposit to make trades, according to various reports. Here’s what that means: If you deposit as little as $500 in your account, you can borrow up to $250,000.
Securities regulators worry that can encourage investors to get into serious trouble by borrowing to make risky trades, for things they don’t understand.
“One has to question the legitimacy, credibility and morality of teams endorsing products around which there are some serious regulatory misgivings,” Simon Chadwick, a professor of sports enterprise at the University of Salford in Manchester, told Bloomberg recently. “Clubs and players need to become more mindful of the ramifications their commercial partnerships can have.”
Unfortunately, Ronaldo isn’t alone. Numerous football clubs in Europe have similar connections to brokerages, including Club Real’s rival Atletico de Madrid, and England’s Liverpool and Manchester teams, according to reports.
Wait, what’s a derivative?
Derivatives are complex, but high-risk investment tools. In the simplest sense, they are contracts between a buyer and a seller for an underlying asset–gold, or oil, bonds or the stock of a company are some examples– to be delivered at a predetermined price on a specific date.
The average investor has no business investing in derivatives, experts say, as they are based on speculation. Credit default swaps built on subprime mortgages, for example, are the derivatives that nearly sunk the U.S. economy back in 2008.
One Irish judge reportedly called CFDs a “volatile form of gambling.”
Confused? Don’t worry, derivatives and their role in the market can confound even the most expert investors. That’s another reason why financial experts are shaking their heads at Ronaldo’s endorsement of this kind of risky investment.
Be careful about investment advice
We love athletes for their amazing abilities on ball fields, tennis courts, on soccer fields, and swimming pools. And more than a few are able to take their hard-won millions and parlay those dollars into successful investments.
Golden State Warriors basketball player Andre Iguodala, for one, has become a tech investor, working with the storied venture capital firm Andreessen Horowitz. And Carmelo Anthony of the New York Knicks has launched his own venture capital firm, Melo7, which has invested in Lyft and Casper.
Yet for every sports star who has made a success of their investment ventures, the field is strewn with plenty of others who have lost millions of dollars.
Famous cautionary tales include:
- Pitcher Mike Pelfry who reportedly lost his shirt in a $7 billion-dollar investment Ponzi scheme in 2009.
- NFL legend John Elway and a co-investor sank $15 million to what turned out to be a scam run by hedge fund manager in 2010.
- Former Chicago Bull Scottie Pippen sued his investment firm for $8M, claiming they didn’t do enough due diligence on the adviser who gave him bad advice.
- Baseball Hall of Famer (and mustache icon) Rollie Fingers declared bankruptcy in 1989, when it came to light that much of his money had been tied up in Arabian horses, wind turbines and other failed investments.