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In Divorce, Transparency Is Key for Both Parties to Succeed
These last few years, I’ve participated in many collaborative divorce cases as a financial neutral. As most know, when you are hired as a neutral on a case, your goal is to help both clients meet their needs in the divorce, so that the dissolution agreements are sustainable long after the final agreement has been signed.
When hired as a client advocate and not as part of a collaborative team, I am often told many things that are personal in nature and should not be divulged in order to protect the client’s privacy. Some of these things include: undisclosed accounts, gifts to oneself, an upcoming trip, new loves, etc.
These last few years, I’ve participated in many collaborative divorce cases as a financial neutral. As most know, when you are hired as a neutral on a case, your goal is to help both clients meet their needs in the divorce, so that the dissolution agreements are sustainable long after the final agreement has been signed.
When hired as a client advocate and not as part of a collaborative team, I am often told many things that are personal in nature, and should not be divulged in order to protect the client’s privacy. Some of these things include: undisclosed accounts, gifts to oneself, an upcoming trip, new loves, etc.
Collaborative really stretches us as professionals to make a paradigm shift in how we approach our work. The more collaborative work I do, the more I realize how challenging it really is. What one may not need to divulge in a case as an advocate has to be carefully considered in a collaborative case: How do we approach the information? How do we address a sensitive topic? How do we divulge the new facts?
Let’s look at an example. In a case I am working now, the client’s employer just merged with another company, forming a much larger publicly traded company. My client, as a result, was awarded numerous stock options. After meeting with the attorney, we decided that if the other spouse did not ask for it, we were not going to mention it. We are filing the proper and complete financial affidavit, but we are not going to bring it up in settlement negotiations. We are leaving the burden on the other spouse to see our disclosure and ask for the funds.
In a collaborative case, this news and additional bonus would have been divulged in the joint session. It would have been discussed by the financial neutral, the dollars around it and how it affects the Equitable Distribution or Property Division agreements. Invariably, it would be a defined agenda item. It is not only about what one person wants, but more about what is best for both moving forward. As a professional, this takes what we call a paradigm shift in the way we approach a case.
Collaborative changed me these last years.
As much as I would love to say I do 100% collaborative now, I still do not. My practice is growing every day to be more and more collaborative. However, I still do a lot of litigation and settlement support. I have cases now that are not collaborative, but my training in collaborative and mediation these last years has positively affected the way I do business. Cases in recent years, when things have been unknown, I have asked my client for permission to just call the other spouse. It has worked, and we have avoided costly court costs around discovery. We have been getting our information in a timely manner without going through the cost of multiple attorneys and paralegals. We are cutting out the middle man by being direct and open and communicative with the other professionals.
Divorce is a very traumatic experience for clients, and when they know they have someone that is trying really hard to do the right thing, everyone responds positively. After 8 years of collaborative, I see it seeping into every aspect of my work and personal life. I am still making paradigm shifts every day. I know that the collaborative work is hard, and the more I learn about it and the more experience I have with it, the more respect for it I have.
To learn more about collaborative divorce, please visit: https://www.collaborativepractice.com/
Jennifer Failla, CDFA™
Principal, Strada Wealth Management
Toll Free: 866.526.7098
Email: info@stradamanagement.com
Are My Dollar Bills Transparent?
In a financial advisory relationship, it is important for investors to understand the multitude of fees they may be required to pay.
When you walk into your CPA’s or attorney’s office, you sign an engagement letter, and pay a fee for their services; there are not a lot of hidden costs. Their engagement letter outlines expenses including charges for photocopies and interest charged on late payments. With your financial advisor, that may not necessarily be the case.
If you ask your financial advisor, “What is your fee?” the common response is, “a percentage of your Assets Under Management (AUM).” A percentage of your AUM is the percentage of money your advisor manages. So, if your advisor manages $1 million dollars, you pay $10,000 a year; some advisors charge more and some charge less. I read recently that a typical fee was 1.5% of AUM (Investment News).
A prudent investor seeking transparency, understanding and knowledge will ask about other potential fees, such as:
- Management fees;
- Sub-manager fees (if someone has been retained to manage a sub-portion of your portfolio);
- Sales charges;
- Transaction costs;
- Custodian fees (fees charged for the safekeeping of your securities and other administrative services like collecting dividends and interest);
- Performance fees;
- Mortality and expense fees (in certain investments like commission-based annuities);
- Mutual fund expenses;
- Operational expenses; and
- Surrender fees (in some annuities).
As an investment manager, I may go to a potential third-party money manager and say, “I’m looking at this investment for my client. What are their fees?” and they’ll typically reply, “The fee is x%, but the client will only see your fee on the statement.” I’ll reply and say, “The client still pays the fee whether they see it or not. They should know what they are paying.”
My charge to you as an individual investor is to know what you are paying and why. Compose a list of questions for your financial advisor to learn exactly what fees are being charged, to whom they are being given and how they will impact you. Also ask your advisor to see all performance net of fees.
My charge to the financial industry is that all fees become transparent. Over a 20- to 25-year investment period, fees can add up and cost investors a lot of money. I understand we have to earn our living, and if we are prudent and fiduciaries to our clients, we will earn a great living. However, the fees need to get easier for our clients to understand. This is paramount in establishing trust with them.
As an investor, you can’t control what the markets are going to do, but you can control the information you have when you’re doing your own investing: minimizing your taxes, keeping fees low and staying ahead of inflation.
Our firm prides itself on giving you all the information so you can make informed decisions that best suit your needs.
Jennifer Failla, CDFA™
Principal, Strada Wealth Management
Toll Free: 866.526.7098
Email: info@stradamanagement.com
Announcing Strada Wealth Management, LLC
We are proud to announce that we are changing our company name from Failla Financial Management, LLC to Strada Wealth Management, LLC.
The name change is due to the significant change in our business structure. Strada Wealth Management is now a fee-only Registered Investment Advisory firm and as always, our business activities will continue to include comprehensive retirement and income planning for families just out of divorce.
As a fee-only registered investment advising firm, we are able to truly assure our clients that our advice is objective and independent. Compensation never comes in the form of commission or trails (money paid to the financial adviser for chosen investments), and as a result, we are our client’s fiduciary.
Our former e-mail addresses will continue to be operational for the foreseeable future. Our new email addresses are as follows: jfailla@stradamanagement.com and ssakala@stradamanagement.com. Our web domain is in transition - www.faillafinancial.com will change in the near future to www.stradamanagement.com. We will continue to update you on our progress and improvements; we strive to be better for you, our clients. Thank you for all these years of trust in the firm.
Warmly, Jennifer Failla
Jennifer Failla, CDFA™
Principal, Strada Wealth Management
Toll Free: 866.526.7098
Email: info@stradamanagement.com
The Post-Divorce Checklist
Your divorce is final. What’s next? How do you move forward? How do you find the right path to follow?
Initiating the next steps can be daunting, overwhelming, and frightening, but the idea of starting fresh and new is worth the trek through the mud. Planning a new lifestyle can bring about feelings of excitement, inspiration and normalcy. With the support and guidance of a professional, transitioning to life after divorce can be simplified.
When dealing with a divorce decree, one of the things we focus on at Strada is creating a post-divorce checklist before the divorce is actually final. In the last stages of your divorce, there are many things you can do to help prepare yourself for the next phase.
The purpose of this blog is to shed some light on some of the things one might have to complete, per their decree. What we like to do is sit down with the client and the nearly final draft of the Marital Settlement Agreement (MSA) (or divorce decree) to determine the most pressing tasks. We then create a checklist using those tasks as our guide. You can do exactly the same thing at home.
As a companion to this article, please feel free to download and use this Post-Divorce Checklist PDF to keep track of all of the important tasks associated with life after divorce.
Your post-divorce tasks might fall into these major areas:
- Cash management - budgets, spending needs including potentially a home
- Tax organization
- Understanding your investments and redefining your portfolio to suit your needs
- Insurance analyses - health, auto, home - do they still work for you?
- Coordinating new estate plans - often pushed off but critical to address within 6 months of divorce finalization
Sit down and read your decree, divide your tasks into the above categories and tackle them one at a time.
For example: Cash management: change banks, open new accounts, close credit cards, analyze new expenses including groceries, and let things settle for 6 months before making big decisions; Taxes: determine who is filing, by when, what documents do you need to share, how will you archive. What can you do to prepare for your new tax status as Single or Head of Household?
There are many things that need to be completed after a divorce, but one of the most pressing concerns is “How and when will I get my money?” This could entail:
- Multiple transfers and title changes on accounts
- Transferring ownership of different investments
- Coordinating the paperwork around opening up new accounts and having funds transferred in
This is the time of year where we start the tax organization process with our clients. Post divorce, this can be even more confusing. With regard to income tax and obligations and returns, one person might be obligated to file and report to the other. There are so many executable action items that need to be considered pursuant to a divorce:
- Beneficiaries on insurance policies and/or individual retirement accounts
- Executing to qualified relation domestic orders
- Transferring IRAs
- Stock option executions
- Distribution requests
- Name changes
- Removing signors on accounts
- Transfer of titles on property
- Health insurance changes
Once through the administrative matters of the divorce, you can focus on your future, how you want to live and how you visualize your new life ahead.
Dealing with all these issues can be overwhelming, but a controlled, well-defined approach will help you complete each one in an accurate and efficient manner. If you have any questions about post-divorce tasks, please feel free to give us a call.
Jennifer Failla, CDFA™
Principal, Strada Wealth Management
Toll Free: 866.526.7098
Email: info@stradamanagement.com
Save the Date! Apr 17 - Why Collaborative Needs To Be a Part of Your Practice
Join me on April 17, 2014 as I present at the Collaborative Family Law Institute's event for Attorneys, Mental Health Professionals, and Financial Professionals on why your practice should be collaborative. See below for details. Hope to see you there!
For more information, please contact Lisette Beraja, LMFT at 305-858-7763.
Please click below to register or RSVP.
Thank you for your attention and response. We look forward to seeing you at the event!
Jennifer Failla, CDFA™
Principal, Strada Wealth Management
Toll Free: 866.526.7098
Email: info@stradamanagement.com
Know What You Own for Your Own Sake
One unintended consequence of getting a divorce is that it forces people to get their financial houses in order. Often clients come to my office and have little or no idea what is actually in their portfolios, or how much any of it is worth. One of the first things I do when I sit down with clients is to educate them as to what they actually own. We are most often paralyzed into inaction because of fear. We overcome that fear with education! We then discuss both the short-term opportunities and long-term implications of their holdings.
These are some of the questions to consider when evaluating your assets:
- How many accounts do I have, and what forms do they take?
- In whose name(s) are they titled?
- What are the tax implications of each asset? How does that affect my tax bracket? (see next blog article for more on that).
One discussion I have quite frequently is explaining the difference to clients between two different, but somewhat similar, financial instruments within their portfolio: ETFs (Exchange Traded Funds) and mutual funds.
A mutual fund is a pool of funds collected from many investors for the purposes of investing in securities. An advantage of a mutual fund is that it allows an investor to participate in a selection of securities with a smaller amount of money. Your $100 investment might be able to buy small pieces of many companies for increased diversification.
An Exchange Traded Fund is basically a number of stocks packaged to sell like a single entity - same goal intended; you purchase lots of companies for a set dollar price. There are hundreds of mutual funds and ETFs on the market to sort through and understand.
Mutual funds have been around for a long time now, and most people are relatively familiar with them, but ETFs are relatively new. Many people do not even know what they are, let alone how it might prove beneficial to their portfolios. Here are some of the key distinctions:
- ETF fees are significantly less than those of mutual funds: Typically ETF fees range from .5% to 1%, as compared to fees of 1-3% for mutual funds.
- ETFs can be more efficient: This is because they are traded intraday, not just after the market closes. If there's a buy or sell order you want to place, you can have it executed right away. You don't have to wait for the market to close, and for the managing company to go out and re-calculate its value before being able to make your trade.
- ETFs allow you to control how and when you pay taxes on any profits you make: Whenever a mutual fund realizes a gain that is not balanced by a loss, the mutual fund must distribute capital gains to all its shareholders. These gains are fully taxable to each shareholder, even if the profits are reinvested. In contrast, holders of ETFs only realize taxable gains when they make the decision to sell their own shares. This leaves the tax planning in the hands of the shareholder him or herself, not a fund manager.
If you are going through a divorce, the first glance at your portfolio may seem like the junk drawer in your kitchen, but that’s why professionals are here to assist you in understanding and evaluating your finances. Organize your accounts and understanding your holdings is critical.
Once all the assets are clearly identified, valued and tax-affected, you will understand how to make better strategic decisions regarding your financial future.
Jennifer Failla, CDFA™
Principal, Strada Wealth Management
Toll Free: 866.526.7098
Email: info@stradamanagement.com
Ensuring Long-Term Financial Interest
Tax efficiency - when discussed in divorce, portfolio construction, and investing in general - is how much of your money is left over after you’ve paid your taxes. How efficient was that investment to your personal bottom-line?
To understand how efficient a particular investment may be, a person must understand what they own inside the portfolio, but also how those instruments are taxed so they can efficiently calculate their true net income potential. At the end of the day, you need to understand how your investments are working for you and how your life is impacted by it.
There is often confusion around what is taxable, what is tax-deferred, and what is tax-exempt.
- Taxable accounts, such as a checking account that earns interest, would be subject to taxes on the interest.
- A tax-deferred account indicates investments which are sheltered from taxes as long as they remain inside of the account; for example, an Individual Retirement Account (IRA) or 401(k) plan. If those investments are taken out, those monies will be taxed at ordinary income tax rates.
- Tax-exempt investments are those not subject to federal or state taxation, such as income from a municipal bond.
The distinction is important to understand, especially in a divorce when a client might be reviewing an account for income potential. Income from a taxable account will be treated differently than a tax-deferred account, depending on the client’s tax bracket. A tax-deferred account may have growth, but taxes must still be paid when funds are withdrawn. A good question to ask oneself is: how much net income will this investment in this account yield me?
Each account has advantages and disadvantages. The first steps to becoming tax efficient and investing wisely is to understand your tax bracket; understand the classification - or “titling” - of your accounts; and understand the investments in your accounts and how they affect the income.
There is a common rule that the investor should protect inefficient investments in tax-deferred accounts (e.g., 401(k)s and IRAs), and tax-efficient investments in taxable accounts (e.g., brokerage or checking accounts).
Placing high-growth stocks, Exchange Traded Funds, and mutual funds in tax-deferred accounts like 401(k)s and IRAs can allow an investor to make trades, capitalize on profits, losses, etc. without the worry of taxes. Tax-inefficient accounts might be a good fit for municipal bonds since the income generated is tax free.
This is not a catch-all, but it can provide a guide for understanding. An investment advisor or your tax professional can help sort through the specifics in your individual portfolio.
We have a saying in our office: “Divorce forces you to put your financial house in order.” We say this a lot. Every investor can benefit from taking a hard look at what one owns, why it is in a particular account and whether or not it is even working for the needs and objectives of the investor.
Jennifer Failla, CDFA™
Principal, Strada Wealth Management
Toll Free: 866.526.7098
Email: info@stradamanagement.com