FICO Scores are changing soon

Fair Isaac & Co. is tweaking their methodology for computing an individuals FICO score in 2008. As you may already know, your score affects the rate you pay on loans (mortgages, auto, credit card); but you may not know that your FICO score is now frequently used by auto insurance companies, employers, hospitals, and others.

It’s more important than ever to ensure you have the highest FICO (credit) score possible. The typical recommendations for improving your score are:

• Avoid using too much of your available credit card debt
• Remove errors on your credit report (get reports free at www.annualcreditreport.com)
• Avoid making late payments
• Shop for auto/mortgage loans all during the same month
• Maintain old credit card accounts and if necessary, use them on occasion to keep them open

However, there are additional recommendations given what we know about the new scoring methodology:

• If you’re an authorized user on someone else’s credit card, you need to drop that and get your own card. FICO will no longer count authorized users toward good credit.
• Try to have a mix of loan types on record. You should have a better score if you have installment loans (student, auto, mortgage) and revolving accounts like credit cards.
• Pay your bills on time! More weight is being placed on billing issues (delinquencies) compared to the old FICO calculation method.

There are of course other credit rating systems out there, but these systems (including FICO) are all black box calculations that look at similar factors. Most of this work to repair or protect your credit is pretty straightforward, and if you maintain good habits around debt you’ll be in good shape. For those with problems, you will have to be patient since improvements take a while to “stick”; don’t be tempted by quick fixes or credit repair firms!

Beware the returns of March (and beyond)

As the first quarter of 2008 comes to a close, it is now a common time for people to check their investment performance and investigate new investment opportunities. If you look at the investment performance of various mutual funds (e.g. US large cap), many of them had terrible performance in 2001 and 2002 (even when compared to what we’ve experienced these past few months).

Beginning with 2008, advertised 5-year performance figures will not include these “spurious” old returns. Caveat emptor…

Confused about what the difference is between a broker and an investment adviser?

Me too! Just trying to figure out what’s happening with regulations and disclosures will only further confuse you, but here’s a list of keywords to google later: Merrill Lynch Rule, RAND Report, Cutting Through The Confusion.

There are various lobbying efforts, lawsuits, etc happening because they (huge brokers, investment advisers, consumer groups) all want a share of the “pie”. I think the main reason for the confusion has to do with politics and capture hypothesis in regulation, with the result being that this battle may never end until the structure of the financial services industry changes (and that may not happen in my lifetime).

So what is the take-away? It’s actually quite simple: A consumer must continually ask a financial services provider (broker, financial consultant, etc) if they are providing advice and service as a fiduciary.

In our industry, a fiduciary must advise and act in a client’s best interest, while a non-fiduciary must advise and act in a manner deemed suitable. Obviously, from a client perspective, suitability is a lower standard.

Now the problem is that some folks out there state that they sometimes provide services and advice according to the suitability standard, and sometimes according to the fiduciary standard. And if you follow the rule above, it makes for difficult conversation if every other question you ask is “are you acting as a fiduciary right now?”.

Let me be the first to propose an easy solution to all these lawsuits and convoluted regulations: When services and advice are given under the fiduciary standard, the person has to wear a bright green button on their collar; when given under the suitability standard, the person has to wear a red button on their collar.

And on the phone, two different tones can be added to the line in a similar fashion to the familiar “beep” you hear when somebody calls you on a recorded line. A website could have a small green or red flashing image in the top right corner of the web page.

So if you’re working with a guy that is constantly switching buttons, or you hear a melody of tones on the phone line — you’ll surely know you’ve got a flip-flopper on your hands.

That’s it, problem solved!