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F1 drivers: risk averse when not behind the wheel

F1 drivers: risk averse when not behind the wheel

Racing car drivers seemingly live fast and dangerous lives, but surprisingly, they usually make for cautious investors.

‘Everyone is of course different but on the investment side, there does seem to be a pattern of some risk aversion,’ said Christian Flackett, director, private client investment management, at Smith & Williamson.

Flackett runs portfolios for a range of global clients from motorsport and music personalities to landed estates.

When most think about motorsports, the first association is the danger. Many would also assume that people in an industry, such as F1 drivers, will be more prone to taking risks. However, Flackett has observed that first, the industry has become a lot safer than many realise, and those in it also prefer to play their financial affairs safe.

‘They often say they take day to day risks out on the circuit. They tend to have considerable property exposure, whether that’s residential or commercial. One client had invested in hotels. They want something that’s going to be non-correlated and what they try to do is diversify their assets,’ he said.

‘They feel they don’t need to take too much equity risk. The maximum tolerance is usually around the levels of a balanced portfolio.’

Taking this into account, another important factor to consider when managing investments of such individuals is the overall planning.

‘A lot of drivers will get paid in different jurisdictions. It’s vital to have in place the correct structures, trusts, companies, where they are registered, relevant to where they are resident. You need a good international lawyer who can advise on all of that, and all of the potential pitfalls of earning a living in one jurisdiction and being paid from another.’

Frequency of income

With sportspeople, one of the assumptions is they burn through cash fast. However, unlike football stars, the cash burn rate of a typical successful racing driver is far less, according to Flackett.

He says they tend to be able to manage their money more sensibly. However, like other people in sports, their income can be volatile.

Paul Denman, director, private banking at Arbuthnot Latham, said: ‘Professional racing drivers are much like people in the media. They are going to have different roles, will have sponsorship agreements, they will be paid by a team for their services and what they do. That can be quite sporadic. They can get a contract for just three years. There isn’t continuity.’

When that is the case, being independently wealthy has helped, which Flackett says most professional drivers are. If there is no family wealth to fall back on, there have been cases of people whose driving careers ended and they have moved on to other parts of the motorsport industry, following the example of Niki Lauda.

Lauda, the former three-time F1 world champion who suffered one of the sport’s most famous crashes, is now non-executive chairman of the Mercedes AMG Petronas Formula One team.

‘We all know of racing drivers and team owners who become commentators and have had high profile roles to play, but there isn’t room for everyone to do that,’ warns Flackett. ‘That is when a lot of them fall back on the family business and carve out a completely different career.’

Still, for Arbuthnot, the industry presents a growth opportunity. More and more people are getting involved in motorsports and the firm provides bank services to people working in all parts of the sector, including those in media to wealthy drivers who collect expensive cars.

‘People with money have been able to buy a race car from the ’50s and ’60s, and they compete in Europe and America. That’s a big area for an organisation like this,’ said Denman.

He added that improving safety standards have also helped to broaden the sport’s appeal.

Having the difficult conversations

However despite this, Flackett points out that a possible abrupt end to a client’s earning capacity still needs to be considered.

At Smith & Williamson, when signing on a client, he asks if they have an up-to-date will in place and enduring power of attorney. This is for most clients, he explains, but can be especially relevant for those working in more dangerous industries.

‘We ask for a copy of it [the power of attorney] in case a client loses capacity. If someone is in a coma, even in day to day activities such as paying bills, it’s vital to be able to have that and that it’s registered, so we are then able to accept instructions from the attorney.’

At Arbuthnot Latham there is a prerequisite for members of the private client team to have these conversations around wills and succession with clients, added Denman.

Top Formula One salaries, 2017

1. Fernando Alonso (McLaren): $40 million including bonuses

2. Lewis Hamilton (Mercedes): $31 million plus bonuses

3. Sebastian Vettel (Ferrari): $30 million plus bonuses

4. Valtteri Bottas (Mercedes): $8.5 million including bonuses

5. Kimi Raikkonen (Ferrari): $7 million plus bonuses

6. Daniel Ricciardo (Red Bull): $6.5 million plus bonuses

7. Felipe Massa (Williams): $5 million

8. Nico Hulkenberg (Renault F1): $3 million

9. Max Verstappen (Red Bull): $3 million plus bonuses

10. Sergio Perez (Force India): $2.5 million

Source: The Drive

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