Not All Credit Reports Are Created Equal

When I work with divorce cases, my team and I sit down with the client and map out a strategic plan of all the things we need to uncover and discover about the marital family. As part of the divorce planning process, one of the things we do is to pull a credit report.

In my professional networking I found Georg Finder, who below, has explained the major differences in credit reports. Specifically, he shares tips and insight to which of these credit reports is better for the client and the settlement process. Georg is a Credit Damage Evaluator based out of Fullerton, California.

What are the basics to know about credit reports?

The first thing to know about credit reports is that there are 2 kinds:

• A commercial subscriber report - sold only to business subscribers or commercial subscribers. It is written in code.

• A consumer disclosure report - often known as the free credit report., is written in plain language. No codes allowed.

All consumer credit reports are available through either TransUnion, Experian, or the CBI company, which publishes the Equifax report. Most people will only go with one of these 3 companies, but it is in consumers’ best interests to get all 3 credit reports, or they will have an incomplete picture. Credit reports do not look the same, and they are very competitive; that's why all 3 are required.

Why are there two kinds of the consumer credit reports?

The consumer disclosure report (free report) has been around since about 1990. In 1991 it became obvious to lawmakers that, although in 1970 consumers had been given the right to know what was in their credit report, they couldn't read it because it was in code - if you didn’t know the code, it was gibberish. They came up with the idea of a consumer disclosure report under threat of lawsuit by 19 states. One stipulation of the agreement was that the credit bureaus would provide a code-free, plain English report to the consumer.

Over the years from 1990 to 2012, most people assumed that the information in the subscriber report and the information in the free consumer credit report would be the same - because everyone assumed that they were based on the same information.

The Wall Street Journal conducted a study, and discovered that assumption was not true. They found that free credit reports were not as accurate because they contained misinformation, as well as missing information. The amount of error was calculated by The Wall Street Journal at a rate of approximately 20% - 40%. Unfortunately, these were not tiny details, but the kind of information that either rejects or approves a credit application.

What recent factors occurred to produce more accurate credit scores?

In 2012, The California Public Interest Research Group published  a new study, and they found that the difference of information between the 3 credit rating companies had gone from 20% - 40% to about 70%, and that is a kind of information that is decisive to credit granting decisions.

One of the other features we have found with free credit reports is that typically the scores are higher than what is given to a subscribing business that looks at a credit report. Lenders and employers and insurance companies will not even look at a free credit report as part of an application.

The most authorized person to obtain a credit report is the person whose name is on the report. That person can go to a commercial lender and tell the lender, "I would like to know how much I could be pre-approved for in applying for a loan." Most lenders, if they think a person is going to be approved, will pull a full-fledged credit report on the potential borrower, and are often willing to give that information to the potential borrower in the hopes of earning their business.

At Strada Management, as part of our divorce planning and wealth management process, we pull the client’s report and review it together for discrepancies and completeness. We compare all three brands of reports to be sure all agencies are reporting the same information. If the client needs to purchase a new car or a new home, we use the credit report as a base line to negotiate property settlement agreements, based on their capabilities.

For example, a previous client needed to purchase a new car, but her credit score alone was not high enough for an auto-loan approval. We negotiated with her soon to be ex -husband so that his credit could be used to in conjunction with hers in order to get the approval for a new vehicle before the divorce was official.

Credit reports can be important components in a divorce, but in light of the shortcomings of typical free credit reports, it may be prudent to delve deeper. Join me next time when I tackle the subject of reading and understanding a subscriber report.

Jennifer Failla, CDFA™
Principal, Strada Wealth Management
Toll Free: 866.526.7098
Email: info@stradamanagement.com

Enjoy the Journey to Your Retirement Savings Goal

Retirement accumulation isn’t just about the ending balance in your account, but what you can do while accumulating for your retirement that still allows you to enjoy your life.

It’s parallel to everything we do in life. You build your career to get to a certain position, to reach a certain goal. Sometimes we might forget that the process is just as important. You can pause within the process to take time to enjoy what you are doing, without having to rush or sacrifice it all to get to the end goal.

I’ve changed the risk questionnaire and retirement portfolio scenarios I present to my clients to determine age bracket goals: “Tell me what your 40s look like? Your 50s? If you have kids and they are out of school, what are some of the things you want to do? Are you willing to have less in retirement to go and enjoy those things?”

I think the answer is going to be “Yes!”

When I transitioned my practice from the independent broker-dealer to the registered investment advisory firm, I polled my clients and asked them to tell me what they liked these last 6 years, and what I could have done better or differently. This issue of planning to save but still enjoying the money came up, and I think it is important enough to share.

The more conversations financial advisors have around these questions now, when things do change, clients will be prepared and ready for those changes. In other words, if the client thinks they need to be constantly accumulating, but then decide they want to get that special trip or vacation residence, they might experience guilt around it. This is unnecessary guilt, and clients should be reassured that all things can become part of their plan. Planning in advance allows advisors to bake in those goals; clients can have freedom to explore ideas without the potential guilt around how it’s going to affect their retirement.

Case Study:

For 6 years, a client saved $175,000 to remodel his home. A year and a half ago, he came to me and said, “Oh Jennifer, please don’t be upset. I bought a vacation home.” I explained that I wasn’t upset, but that the modeling would have to be adjusted to account for those expenses during retirement.

The client became nervous about how the vacation home might negatively impact him. When we eventually sat down to discuss the possibilities, the client said, “Jennifer, I don’t know if I’m even going to make it to 70 to take the accumulated money and enjoy it. I want to enjoy it now while I’m still alive.”

The balance between not outliving your money in retirement, but still enjoying life, is a tricky balance. Advisors have a challenging though not insurmountable role to help clients understand that it is a balance, and that they can enjoy the things they want in life.

Jennifer Failla, CDFA™
Principal, Strada Wealth Management
Toll Free: 866.526.7098
Email: info@stradamanagement.com

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.  

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

The Power of a P.O. Box

I lost my wallet over the holiday season. Maybe someone took it; I really do not know and it does not matter.  Aside from the loss of something sentimental, I do not need to express the hassle around replacing everything in one’s wallet. For three days I tore apart the house, the neighbor’s house, the car, and traveled all around town asking merchants if they had seen it. I must have retraced my steps ten times and I was frantically checking my accounts every three hours; I was sick over it.

Here was the silver lining:

They had the card number, the three/four digit security codes, and my physical address (for a billing zip code). Theoretically, they had everything they needed to make purchases online. However, I have a P.O. Box that I use for all my billing purposes. It is located in a different zip code than my physical address, so they could not input an accurate address tied to the card. Ah ha! My license has my physical address on it, but after checking my accounts over and over again, I realized even if someone had my wallet, they could not use the cards to make a purchase.

We cannot be too careful these days with our identity. In the wealth management practice, I show clients how to protect themselves using shredders, checking credit reports 2x a year, the use of lock boxes or safes in the home to protect important documents, etc.

This past holiday season has taught me to include one more thing. For $35 dollars a year, you can have a P.O. box outside your physical address’ zip code or different than your license zip code to better protect yourself. If you pay your credit cards online, then you do not even have to go there, but every so often. Or BETTER yet create a paperless account and link credit cards to a cash management program for categorization and tax planning.

The P.O. Box helped us maintain the security of the family finances and that was a great holiday gift!

Jennifer Failla, CDFA™
Principal, Strada Wealth Management
Toll Free: 866.526.7098
Email: info@stradamanagement.com

More on Investment Fees

Last week, I wrote about investment fees in my blog, Are My Dollar Bills Transparent? I was lucky to hear from a colleague of mine who shared his recently published piece on the same theme. Improve Your Future Investment Returns By Keeping a Lid on Your Expenses by Steve Thorpe of Pragmatic Portfolios, LLC, illustrates why it's so important to keep expenses low. 

Registered Investment Advisors can help clients with this same philosophy discussed in both my and Steve's blogs. Below is a short excerpt of Steve's blog.

Improve Your Future Investment Returns By Keeping a Lid on Your Expenses By Steve Thorpe

Contrary To Popular Belief: Past Performance Truly Does NOT Predict Future Performance

Numerous studies have shown that investors have no reliable way to identify, in advance, which asset classes or active managers will outperform in the future. This phenomenon is persistent across time, market subsectors, and geographic regions. To a large extent, where outperformance exists it is due to random chance -- being in the right place at the right time -- as opposed to skill.

Click here to read Steve's blog in its entirety.

Steve Thorpe is the founder of Pragmatic Portfolios, LLC, a fee-only Registered Investment Adviser based in Durham, North Carolina, that focuses on developing sensible investment plans integrated across all of a client’s investment accounts. He also chairs the Research Triangle Park, NC area chapter of the Bogleheads® [11] investment interest group.

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