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Fiduciary Standard

Don’t Miss Out On Your ESPP

By | 2019, Money Moxie | No Comments

If you have an Employee Stock Purchase Plan (ESPP), you might wonder if it is a good value. An ESPP can be very beneficial, depending on how the plan is written. Check the plan rules to see if it lines up in your favor. If so, then you should (1) participate as much as you comfortably can and (2) cash out each year as soon as you can. Here’s why an ESPP is usually a good deal.

An ESPP allows you to contribute a percentage of your income each paycheck towards the purchase of company stock. The payroll deductions go into an account and are held until the end of the purchase period, typically yearly. At that point, you “purchase” company stock usually at a 15% discount, which is a nice benefit by itself.

If your plan has a “look back” provision, it is a bonus. A “look back” provision gives you the price on either the offering date or the purchase date, whichever is lower. So, even if the company stock is down from the offering price, you still get it at a 15% discount from its lowest price. If the stock is up, you purchase at the lower price and may have significant gains.

These potential gains may make the transaction attractive, but you shouldn’t sink all your money into the ESPP. Participate at a rate that is comfortable and that doesn’t rob your other buckets.

You should always have short-term, intermediate-term, and long-term buckets. Your short-term bucket should be your emergency fund, preferably in a Money Market or short-term CD (i.e. 1 year or less). We like to see an emergency fund of 3-6 months of living expenses.

Your 401(k) and other retirement savings are your long-term bucket. We prefer that clients save 10-15% per year for retirement. If you already have 1-2 months of living expenses in the bank and you are saving for retirement, you could use the ESPP to build the emergency fund and then to build the intermediate bucket for expenses like new cars, buying a home, etc. Once your short-term bucket is full, then participate more fully in the ESPP.

Cashing out immediately when the stock is available is the safest choice because you lock in guaranteed gains. Just be aware that the distribution will be taxable as ordinary income, unless your plan is qualified, which may have a more favorable tax treatment.

You can choose to hold the stock to lower your taxes. However, you must keep it for one year from the purchase date, and two years after the beginning of the offering period. At that point, the gain above the purchase price will be taxed at a long-term capital gain rate, which is always lower than your ordinary income rate. However, it may not be wise to wait a year. Saving taxes doesn’t help if the stock value goes down by more than your tax savings. That is why the safest bet is to sell the stock as soon as it is available. Only hold on to the stock if your other buckets are filled and you are just investing for the future.

ESPP’s can be a great way to save for the future. If you have any questions about your specific situation, please contact one of our wealth managers.

This article is not a solicitation, offer, or recommendation to buy or sell any security. Financial advisory services are only provided to investors who become Smedley Financial clients. Projected returns are not a guarantee of actual performance. There is a potential for loss as well as gain that is not reflected in the information presented. Past performance is no guarantee of future results. This article is not intended as tax advice, and Smedley Financial does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Smedley Financial assumes no responsibility for the tax consequences to any investor of any transaction.

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Why You Should Care About The Fiduciary Standard

By | 2016, Money Moxie, Newsletter | No Comments

There has been a great deal of media attention surrounding the Department of Labor’s (DOL) recent ruling regarding the “Fiduciary Standard,” and with good reason. Tony Robbins, self-help author and motivational speaker, recently asked random people walking down Wall Street, “What is a fiduciary?” With the exception of one individual, the answer was, “I don’t know.”

This made me wonder – Do our clients understand the benefits of working with a fiduciary?

When Smedley Financial Services, Inc.® began back in 1982 as a registered investment advisor, we became a fiduciary. We have always believed that putting our clients’ interests before our own is the best way to create a lasting partnership with the people we serve.

fiduciary standard

What is the Fiduciary Standard?
The Fiduciary Standard requires that we avoid conflicts of interest. Our recommendations must meet your needs and be in your best interest.

In contrast, financial professionals such as brokers, insurance salespersons, and other advisors operating under the “suitability standard” are merely required to ensure an investment is suitable for a client when purchased. There is little obligation to offer a better investment nor a requirement to monitor those investments in the future.

Why the big concern?
As company pension plans have diminished, Americans now must set aside more of their income to help supplement their own retirement income. This can be a daunting, time consuming task.

At the same time, the retirement investment landscape has only grown more complicated. Lack of investor savvy and awareness regarding retirement account types, not to mention the emerging number of investments available within those accounts, has led investors to rely on the counsel of professionals.

Unfortunately, not all professionals are alike. The new DOL rule seeks to level the playing field, requiring all financial professionals to follow the new Fiduciary Standard. Isn’t it sad that a law must be put in place forcing financial professionals to do the right thing?

Will the rule protect investors?
The new DOL rule will require more work for financial professionals, but hopefully it will also protect investors saving for retirement.

The DOL also states that cheaper is not always better. Price cannot be the only determining factor when making a decision, especially one as important as your financial future.

Consider what you are getting for the fee you are paying. Does your fee include an advisor that will help you determine your financial goals, prioritize those goals, and design a plan to help reach your goals? Will you get ongoing monitoring of your goals and the investments you are making? What if something changes? Who will be there to help address the changes in your life that may impact your financial destiny? What will happen during periods of increased market volatility and who will help you determine if your investments are too aggressive or too conservative?

These are just a few of the concerns that must be considered, but are often overlooked when the primary focus is having lower fees.

You are our primary concern. We invite you to call or come in and sit down with us anytime you have questions. We welcome your call.

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