The Equifax Data Breach and Steps You Should Consider

The recent hacking incident at Equifax, has created a lot of confusion and concern about what it means and what risks it has created for each of us.  As I was looking into it for my own sake, I thought I’d pull together my notes here as well.

First, what is Equifax and what do they do?  The lending business (e.g., mortgages, credit cards, auto loans etc) depend primarily on three companies to provide data to them to help assess the credit risk (i.e., the risk of not being repaid) when a person applies for a loan. Equifax, Transunion and Experian  gather and compile data on individuals through a variety of sources.

That data includes names, addresses, SSN’s, borrowing history and many other bits of information gleaned over time. This under-regulated industry is a prime target for hackers looking to steal data that can be used for a variety of illicit transactions including some where hackers could potentially wreak havoc with your financial life. Data thieves could:

  • Rack up charges on your credit cards.
  • Apply for a loan or credit card using your identity.
  • Steal money from your financial accounts.
  • File a false tax return claiming a refund.
  • Steal your medical information and then use it to, say, fraudulently fill prescriptions or submit medical expenses for insurance reimbursement.

One important first step is to see if your data may have been stolen during the Equifax hack. They have set up a site where you can input your information and learn your personal situation. Note this is per person (by name, SSN etc) so couples should do this individually. There was also a firestorm when Equifax initially caused people to waive their right to sue them if they used this feature – but they have since backtracked from that requirement.

If you have been affected (I was) then you should consider following through on the Credit Monitoring/Fraud Alert service Equifax provides (free for a year).  And unless you are going to be seeking a loan in the near future I would also recommend Freezing your Credit Report at each of the three companies.

A credit freeze will prevent a new creditor from accessing a consumer’s credit report. This move prevents anyone from opening a new line of credit in the name of the consumer who enacted the freeze. To initiate a freeze, consumers must contact each credit firm and follow their procedures. Consumers may contact each of the three major credit firms at:

I was able to do this easily online at the Equifax site but had to call in to the other two to complete the freeze.

You should also consider monitoring your credit report at Annual Credit report – you can do so once per year for free. I also read that you can get a free report once per year from each of the three credit reporting companies so effectively you could check once per quarter at no cost.

It’s a pain to have to deal with this but in today’s world it’s essential to take all steps to prevent the much bigger headache of identity theft.

 

Sources and more reading:

https://www.nytimes.com/2017/09/08/your-money/identity-theft/equifaxs-instructions-are-confusing-heres-what-to-do-now.html

http://www.humbledollar.com/2017/09/stop-thief/

http://www.humbledollar.com/money-guide/freezing-your-credit/

https://www.wsj.com/articles/putting-a-freeze-on-credit-thieves-a-look-at-your-protection-options-1505150917

https://www.bloomberg.com/news/articles/2017-09-11/equifax-hack-is-exhibit-a-in-case-for-regulation-durbin-says

 

 

The new F word – Fiduciary – goes mainstream

The single most important question to ask when selecting a financial adviser is if they adhere to the Fiduciary Standard.  In other words – will they always put your interests ahead of theirs?

That seems like a question you would not have to ask. But the financial services business has been built upon selling complex, high fee products to investors.  Is the primary goal growing your account? No, it’s generating fees for them.

Earlier this year the Department of Labor enacted regulations forcing the Fiduciary Standard onto the financial services industry, applying only to retirement accounts (industry lobbyists fought off the requirement for regular brokerage accounts etc).

The Trump administration is reportedly looking to peel back the DOL regulations but as this Wall Street Journal story reports – it may be too late as the concept of the Fiduciary has been highlighted broadly to investors who are now demanding that of their advisers.

The less you pay for financial advice/products, the more you keep. Don’t accept anything other than a Fiduciary relationship with your adviser or brokerage account manager.

 

High Fees Under Pressure

One of the biggest trends in the investing world is what some have called “Vanguarding” after the immense pressure that Vanguard is placing on its competitors in the asset management business. Similar to the effect that Google has had in my old business – online ads – or that Amazon is having on traditional retailers, Vanguard has been dominating the asset management space. And it’s been doing so largely by offering the lowest cost investment options available.

Every dollar saved via lower fees accrues and compounds to investors’ benefit over time. Investors are slowly awakening to this fact. Even typical mutual funds with operating expenses of around 1.00% are seen as expensive. Vanguard index funds typically cost 90% less. Schwab has also been offering similarly low cost ETFs.

Two stories from the past week illustrate the fee pressure on the industry. First Josh Brown covers the story of a mutual fund company being sued by its own employees because their funds used in their retirement plan are seen as outrageously high.

Since 2010, fiduciaries of the $600 million American Century Retirement Plan populated the plan’s investment menu solely with American Century funds, using a selection process “tainted by self-interest” rather than a prudent one that would have led fiduciaries to use less-expensive funds with similar or better performance, the complaint said.

As Brown says: “In other words, it’s fine for brokers across the country to sell these underperforming, overly expensive A-share vehicles to regular people – strangers – but not for us to own in our own retirement accounts.”

The second news item comes from Fidelity, the mutual fund pioneer that has long prospered by offering high cost, actively managed funds. Fidelity finally capitulated and has begun offering low cost index funds, while keeping their cash cow funds in place. Bloomberg:

“Still, it’s easy to see why Fidelity felt like it had to do something. Investors are increasingly demanding lower fees, which is somewhat problematic for a fund family like Fidelity that is widely associated with expensive, actively-managed funds. According to Fidelity, investors yanked close to $19 billion (net) last year from its actively-managed stock funds. At the same time, investors poured a record-breaking $236 billion into Vanguard, a bastion of low-cost, passively-managed funds.”

Relevant Links

Here are some interesting items from around the Web

From the “sketch guy” Carl Richards:

  • When it comes to investing, focus on the next five years, not the next five days. NY Times
  • The importance of keeping “stuff” to a minimum – de-cluttering is only half the battle. NY Times

Interesting take on the advantages of a liberal arts education from The Atlantic

Here is a great list of advice from the Motley Fool new grads in only five words.  My favorites:

Ben Carlson, A Wealth of Common Sense: Budget. Save. But enjoy yourself.

Josh Brown, Reformed Broker: Buy every month, never stop.

Cullen Roche, Pragmatic Capitalism: Your best investment is yourself.

Finally: Ten Questions for your Financial Advisor.  All are important, but if you could only ask one of them:  Are you a Fiduciary?

 

Brexit, the new Grexit

When the market hits a rough patch, the pessimists and doomsayers (who are always present) double down on their calls for some form of Armageddon. Last week people cited George Soros  selling stocks and going all in on Gold for fear of another global meltdown (nicely debunked here, and here). And there’s alway some exotic but horrible sounding crisis brewing. Today it’s Brexit, short for Britain leaving the EU. Before that it was Grexit – for Greece. Next month it will be something new (Italexit or Frexit?).

It’s always something and while these may be legitimate harbingers of trouble, the problem is there is no way to know with any reasonable level of surety. In January, markets were down sharply but have since rebounded (mostly). If you sold on that fear you missed that bounce. Markets will constantly try to shake out weak hands and throw head fakes to investors.

For the individual investor there is virtually no way to properly understand, interpret and act on macro global economic issues that have been driving markets in the past week or two. None of us can (or should) try to play that game. Goldman Sachs, JP Morgan et al employ legions of economists, strategists and analysts, few of whom accurately predict market action. And none can do it consistently, although they continue to put out market “notes” for their brokers to share with their clients in an effort to look smart and generate action – sales.

That’s not to say we should all stick our heads in the sand. There are sometimes good reasons to sell something in your portfolio: a stock has run up well past an estimation of fair market value, or its fundamental prospects have changed significantly for the worse.

A classic example of the former is Microsoft (see here) that hit a high in Dec 1999 at the tail of the dotcom bubble. It took over 15 years to trade at that level again. An example of the latter is Pitney Bowes (see here), the near monopolist in business mail systems, that also saw its all time high in 1999, right around the time that email was fully established as the corporate communications tool of choice. Today Pitney Bowes remains a near monopolist, only in a much smaller industry. But even those types of events are hard to see and act on.

So while there will always be uncertainty and concern in the future of the market, the reality is that it’s very hard to accurately interpret and act on macro events.  Being diversified with a long-term horizon is one way to ride through this noise.

Interesting things I read this week:

Jim Cramer Mad Money. Questionable Ethics. Or as one site put it “why does anyone listen to Jim Cramer? HuffPo

From Josh Brown – the perils of guessing what the next “hot sector” is going to be.  TRB

Quote:  there is any doubt in your mind about whether or not this is pure, pathetic performance chasing, let me ease your uncertainty. It is plain and simple, the most perfect form of performance chasing you’ll find. 

Never invest in anything you don’t totally understand – and other lessons shared by parents with their children. NY Times

How a $650,100 lunch with Warren Buffett changed one hedge fund manager’s life Yahoo Finance

Jason Zweig  on how today’s low-interest rates distort valuations WSJ

Quote:  “If you can only buy expensive things,” says Mr. Ilmanen, “at least buy a diverse set of them.”