Why the Wells Fargo controversy is important to everyone

Two weeks ago, Wells Fargo, one of the nation’s largest banks, was fined $185 million for opening up bank and credit card accounts for customers without their approval, as well as phony accounts for fictitious people.

Even if you are not a customer of Wells Fargo, this development is relevant for two significant reasons:

  •  It is another reminder of the risk of investing in a specific company, as even ones with previously good reputations can get hit with unexpected bad news, which can hurt their stock price.
  • You should always understand how a bank, financial advisor or stock broker is being paid or incentivized to provide, sell or recommend a product, account or investment advice.

Wells Fargo is now under intense scrutiny and criticism for the actions of thousands of their employees who apparently acted improperly in an effort to meet aggressive sales goals and quotas.

As a result of this news becoming public, their stock has fallen. What is unknown is the impact of these events on the company’s future earnings and business reputation, and thus, Wells Fargo stock. Will they lose customers? Will potential new customers go elsewhere? Will top executives lose their jobs? Even if top executives don’t lose their jobs, this will certainly be a major distraction for Wells Fargo.

This is another example of why our firm’s stock investment philosophy is notbased on individual stock picking. Until the huge penalty announcement, this bad news was not factored into Wells Fargo’s stock price. Wells Fargo previously had an excellent reputation as a well-run financial institution.

We recognize that it is not possible to predict bad news like this, which is why we recommend owning a broadly diversified set of funds. This way, you are not hurt as much by the risk of bad news affecting a single company’s stock.

Incentives, commissions and trust

Wells Fargo employees were under pressure to generate account openings and new credit card accounts. They had sales goals and were incentivized to “cross-sell” products, even if it was not in their customers’ best interest. As a large publicly held company, Wells Fargo had growth targets which certain employees had to meet.

Warren Buffett’s Berkshire Hathaway is by far the largest shareholder of Wells Fargo stock, with nearly 10% ownership. Buffett has yet to speak publicly about these incidents, but many years ago he made the following statement, which is shown at every annual shareholder meeting: “Lose money for my firm and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”

At our firm, WWM is compensated only by the management fee which is clearly disclosed to you during our initial meeting(s), as well as in the Investment Advisory Agreement (IAA) which all clients sign. We do not make more money for recommending a specific fund, bond or any other investment. We are fee-only investment advisors, which means you are not charged a sales commission or “load” when we buy or sell any investment on your behalf. We are proud that our firm meets a high “fiduciary standard,” which requires us to always act in your best interest. Period.

Most banks and large brokerage firms are compensated very differently than how WWM is, for investment advice or products. We are very transparent and clear about our fees. Most of these other firms do not clearly explain how customers are charged or what incentives may exist for certain products or investments they recommend.Most of these firms do not meet the high fiduciary standard which WWM adheres to.

For example, banks and insurance companies often recommend annuities to their customers, but they do not clearly disclose the commissions of up to 8% or the surrender charges you may incur if you don’t hold the annuity for many years. Brokerage firms may not charge a commission on a bond purchase, but they don’t tell you they “marked-up” the price to make a profit on the transaction.

Compared to many of the issues and causes of the 2008-09 financial crisis, the Wells Fargo actions are not nearly as bad. However, the cause of the Wells Fargo penalties, such as employee sales incentives and lack of transparency, are still symptomatic of many large financial institutions.

You should feel confident that as your financial advisor, we have no hidden fees and no sales incentives. When we provide advice to you, it is based solely on what we think is best for you and your family. Our actions and advice are not motivated to meet a revenue quota.

Our advice and service are motivated to develop and maintain very long-term, trusting relationships. Good things will follow from that, for you, our clients, as well as our firm.

Reaction to the Federal Reserve’s Inaction

The Federal Reserve again left short term interest rates unchanged at near zero, at the conclusion of their two day September meeting yesterday.  They will next meet in October and December, 2015.

When was the last time the Federal Reserve increased interest rates?

There has been no change to short term rates since 2008, which have basically been at 0% since then. They last raised rates in 2006.  The Federal Reserve directly influences short term interest rates and indirectly can cause changes in longer term interest rates.

Was the Federal Reserve expected to raise interest rates yesterday?

The Federal Reserve dual mandate is to “foster maximum employment and price stability” (keep inflation around 2% annually).  Many forecasters expected at the beginning of 2015 that there would have already been at least one .25% raise by now.

Due to “recent global economic and financial developments,” the Fed decided to leave the fed funds target range at 0 – 1/4%.  This implies that the Fed did not raise short term rates yesterday due to their concern about the Chinese economy and the huge decline in oil prices and other commodities.  These “are likely to put further downward pressure on the inflation in the near term.”

In her press conference after the Fed press release, Fed chairwoman Janet Yellen said that thee US economy has been performing well, but they did not raise rates at this time primarily due to the recent financial uncertainty.

When is the Fed expected to increase interest rates and by how much?

In their projections, 13 of the 17 Federal Reserve board members believe the Fed will raise rates before year end, in either October or December.  This initial rate increase would likely be .25%.  The key factors are “developments abroad,” labor markets and oil prices.

The board members short term interest rate expectations by the end of 2017 are 2.6%, which is lower than the 2.9% they predicted in their June, 2015 release.  This would imply that short term interest rates on investments like 1-3 year CDs would be around 2.5-3.0% by the end of 2017.  The Fed board member projections have been consistently inaccurate the past few years, but are helpful as an indication of their expectations.

What does the Fed think of the US economy?

The formal Federal Reserve statement “suggests that economic activity is expanding…moderately.” Household spending, business investment, housing and the labor market all continue to show progress and improvements.  These all appear to be positive comments.

How does this meeting and the related information impact our investment strategy?

We expect that the Fed will increase interest rates very gradually, beginning later in 2015.  This bolsters our confidence about the US and world economy.  A very gradual increase in interest rates should be welcomed.

The continued recovery of the economy and still historically low interest rates should provide for growth in corporate earnings.  This should lead to gains in stocks over the long term, of course with volatility along the way.

We remain committed and confident in our long term philosophy of a globally diversified stock portfolio along with an appropriate fixed income allocation, based on your personal situation.

What you should do about the credit card security breaches

Credit card security breaches have been in the news frequently over the past months. What actions do you need to take to protect yourself?

Who has been affected?  People who shopped and paid with any credit or debit card in the following stores may be impacted:

  • Target retail stores between November 27- December 15, 2013
  • Neiman Marcus retail stores during 2013
  • Michaels Stores recently, no specific dates have been disclosed.

The largest credit card security breach incurred at Target. Keep in mind that any credit card that was used at these stores during the affected time periods could be impacted in the future. That could be a Target Card, a Neiman Marcus card, as well as American Express, Visa or MasterCard credit or debit cards.

What is the most important thing you can do now?  The most important step an individual can take is to diligently monitor the affected credit card activity on a very regular basis. We recommend you review the card activity online, at least weekly. The stolen card data from this crime may be resold and activated at some point in the future. Your card could be impacted this week or months from now. At a minimum, carefully review your monthly statement.

What is the benefit of the free credit monitoring services that are being offered by these retailers?

 Target and Neiman Marcus are offering one year of free credit monitoring services to affected customers. While we recommend you take advantage of this service, it does not really address the problems caused by the breach. The impact of the breach is someone may use your card data to make unauthorized purchases on your affected card account in the future. A credit monitoring service is not going to prevent or notify you of these unauthorized purchases. 

Credit monitoring services are primarily to let you know if a new credit card has been opened in your name or for signs of identity theft. These are not the primary risks from these security breaches, based on current information.

How should you enroll in these free credit monitoring services?

Be careful and do not click on links from emails, unless you are very sure of their source.  We recommend that you sign up for these services by going directly to the retailer’s website (by you typing the site address on your computer, not by clicking on links).

I registered for the credit monitoring offered by Target, even though I regularly shop there and was not notified by them of the credit monitoring service. To enroll in this service, go to:  creditmonitoring.target.com. It is a two step process. After going to that web address, Target will email you an activation code sent from targetnews@target.com.  Next, at the credit monitoring website (Experian), you will need to provide personal information, such as your full name, address and social security number.

For information regarding Neiman Marcus, go to neimanmarcus.com/infosecurity, which will also offer credit monitoring service by Experian.

You do not need to pay extra money for a credit score, unless you want it. These free services provide you full reports of all of your credit card accounts and account histories, but a FICO score (or comparable score) cost extra.  See our prior blog post on free credit reports, which you are entitled to annually, at Truly Free Credit Reports.

If you have any further questions, please contact us. We are here to assist you with various aspects of your financial life.

What do the Bank Overdraft Notices and Requests You are Receiving From Your Bank Really Mean

Consumers are being flooded with notifications from their banks, due to new banking regulations that take effect on August 15, 2010.

Simple explanation: Ignore all of it! Don’t do anything and do not sign up for the overdraft coverage that your bank may be offering.

Now the details:

The new rules apply to the use of ATM and debit cards, when being used for purchases. If you don’t use a debit card or ATM card for purchases, none of these changes will affect you and you can ignore the emails and notices that you have been receiving.

If you do use an ATM or debit card for purchases, we’ll explain the new rules. The key is to maintain adequate balances in your bank account and not to incur an overdraft, as the fees are ridiculously high (ranging from $25-$35 per transaction). As of August 15, banks will no longer be able to approve a debit card “overdraft,” without your consent (that is what they are contacting you for, your consent for their new overdraft program).

What this means is that if you don’t accept the offer they are requesting you to “opt-in” for, your debit card will be rejected when you attempt to make your store purchase, if your bank account does not have adequate funds.

What the banks are sending to their customers now is to request that you opt-in for the new overdraft rules. If you opt-in, they have the discretion (not guaranteed) to approve your store purchase, even though you may not have adequate funds in your bank account. By opting in, they may approve the transaction and then charge a fee, which could be $25-$35, per transaction, per day. There are ways these fees quickly escalate every day, unless additional funds are quickly added to the bank account.

We strongly recommend that you DO NOT opt in for the new ATM/debit card overdraft coverage (by doing nothing, you are effectively doing exactly this). If you do not have adequate funds in your bank account when you are attempting to make a store purchase with your debit card, you are far better off to have the transaction rejected, and then pay by some other form, then have the transaction approved and incur the bank fee. The initial fee (and subsequent fees that can accumulate) are likely to be much larger than the amount of the intended purchase.

We recommend that readers review this with their children and grandchildren, who may be frequent debit/ATM card users, for purchases. They may be more likely to use these cards, and more likely to opt-in, based on their bank’s marketing materials.

Source: FDIC website and Consumer Federation of America press release, dated 6/29/10

New FDIC Rules and Planning Opportunities

As a result of legislation enacted on July 21, 2010, FDIC insurance for bank deposits has been permanently increased to $250,000 per depositor, per insured bank.

This is great news for investors, as this permanent change extends the increase in coverage, which was to expire December 31, 2013. This means that investors who purchase CDs with maturities beyond 2013 will know their funds are insured.

There are very specific, and very beneficial rules that can greatly broaden this coverage far beyond $250,000 per individual. For example, if an investor has an account established using a Revocable Living Trust at an FDIC bank, and has 3 beneficiaries of the trust, the account will be insured up to $1,000,000. This is determined by combining the owner of the account and each beneficiary, so would total 4 times $250,000.

The maximum number of beneficiaries that are eligible for FDIC coverage would be 5, so the maximum coverage for an account established with a Revocable Living Trust is now $1,250,000.

This is of even greater relevance right now, given current interest rate conditions, as we are finding that CDs are good, secure investments, and even for taxpayers in high tax brackets, CDs may be safer and provide nearly the after-tax return of top quality municipal bonds.

If you have questions regarding how to structure your investments to gain the security of additional FDIC insurance, please contact our office.

Truly Free Credit Reports and Gift Card Law Change

Free Credit Reports and Why You Should Do This (at least annually)

The only truly free website to obtain a free credit report is: http://www.annualcreditreport.com/. This site is governed by the Federal Trade Commission (FTC). You may also call 877-322-8228.
Beginning April 1, 2010, other websites offering credit reports must clearly indicate in a box the above information. This site will provide you with a link to get your credit report and you will need to answer a number of personal questions, for identification purposes.

The Fair Credit Reporting Act guarantees consumers access to their credit report information from each of the three credit reporting companies, once per year, for free. The best and only way to ensure that you are getting this information for free is to use the above website, http://www.annualcreditreport.com/.

The 3 major credit reporting agencies are Experian, Equifax and TransUnion. Using the above website, you are entitled to one report from each company every 12 months. You can obtain a free report from all three at one time, or order them one at a time, at various times during a 12 month period.

There are many companies that offer credit reporting services and most will charge various fees, along with the “free credit report.” You should be careful of such services. While they may provide you with valuable services, you should not have to pay for the above credit report. Note that this free credit report is not your “credit score,” which is the basis for most lending, such as mortgages and credit cards.

We recommend that you request your free credit report information from each of the 3 companies at different times during the year, not all 3 at once. This is recommended to monitor if the information maintained is accurate and to spot identify theft. You have the right to inform the agencies if you note any errors.

If you want to purchase an additional credit report, for up to $10.50, you can contact each agency as follows:
Equifax: equifax.com, 800-685-1111
Experian: experian.com, 888-397-3742
TransUnion: transunion.com, 800-916-8800

Source: Federal Trade Commission, www.ftc.gov/freereports

New Gift Card Rules: The purpose of the new rules is to prevent service fees on gift cards unless the consumer has not used the card (or gift certificate) for more than one year. The consumer cannot be charged with more than one fee per month and the fees must be clearly disclosed.The Federal Reserve released the rules on March 25, 2010, which go into effect on August 22, 2010.

Expiration dates for gift cards must be at least 5 years after issuance, or five years after funds were last loaded. These rules are for retail gift cards or network branded cards, like Visa gift cards.

The new federal laws will override any state laws that are not as beneficial to the consumer.

Source: Journal of Accountancy, March 25, 2010, “Fed Issues Final Rules on Gift Card Fees, Expiration Dates”