Wells Fargo settles with DOJ and SEC

Focus on remedies, not faults. ~Jack Nicklaus

Wells Fargo (Symbol: WFC) announced it reached a settlement to resolve outstanding Department of Justice (DOJ) and Securities and Exchange Commission (SEC) investigations.

We view this settlement as another positive development in the rehabilitation of Wells Fargo. While there are additional legal cases pending, settling these cases was crucial for Wells Fargo as it works to repair its relationship with regulators. It is also positive to note that Wells Fargo has already set aside all the money it needs to pay the $3 billion in penalties.

There is still more work to do including an upcoming House Financial Services Committee hearing, consent orders with various regulators, and working to remove the Federal Reserve’s asset cap. Still, it is good to see the new executive team at Wells Fargo making tangible progress. Earlier this month new CEO Scharf announced a business restructuring plan.

The full press release of the DOJ and SEC settlement is below.

February 21, 2020 04:07 PM Eastern Standard Time

SAN FRANCISCO--(BUSINESS WIRE)--Wells Fargo & Company today announced that it has entered into agreements with the United States Department of Justice (DOJ) and the United States Securities and Exchange Commission (SEC) to resolve these agencies’ investigations into the Company’s historical Community Bank sales practices and related disclosures. As part of this resolution, Wells Fargo has agreed to make payments totaling $3 billion.

Charlie Scharf, chief executive officer, said: “The conduct at the core of today’s settlements — and the past culture that gave rise to it — are reprehensible and wholly inconsistent with the values on which Wells Fargo was built. Our customers, shareholders and employees deserved more from the leadership of this Company. Over the past three years, we’ve made fundamental changes to our business model, compensation programs, leadership and governance. While today’s announcement is a significant step in bringing this chapter to a close, there’s still more work we must do to rebuild the trust we lost. We are committing all necessary resources to ensure that nothing like this happens again, while also driving Wells Fargo forward.”

As the settlement agreements with the DOJ recognize, Wells Fargo cooperated fully with the government’s investigations.

Today’s resolution includes:

  • An agreement with the DOJ that resolves the criminal investigation into sales practice activities in the Community Bank from 2002 to 2016. As part of the agreement, no charges will be filed against Wells Fargo provided Wells Fargo abides by all the terms of the agreement.

  • A separate settlement agreement that resolves DOJ’s civil investigation.

  • And a separate administrative order that resolves the SEC’s civil investigation. Wells Fargo has agreed to the establishment of a $500 million Fair Fund for the benefit of investors who were harmed by the conduct covered in the agreement. The Fair Fund is part of the $3 billion settlement.

Wells Fargo had fully accrued for the amount of this settlement as of December 31, 2019.

Remedial actions taken by company since 2016

Since 2016, Wells Fargo has made fundamental changes to its leadership, governance, processes, controls and culture to ensure the misconduct that is the subject of today’s actions can never recur.

These changes include:

  • Significant leadership changes:

    • A new CEO and majority of new members on the Operating Committee, Wells Fargo’s senior-most management committee.

    • Significant management changes at all levels of the Community Bank, including senior executives.

  • Reconstitution of a majority of the Board’s independent directors (8 new independent directors), including the majority of Board Committee Chairs.

  • Elimination of all product-based sales goals that led to this conduct.

  • Implementation of a new incentive compensation structure for retail bankers that rewards them based on customer outcomes and requires risk accountability at all levels.

  • Enhancement of the Community Bank’s processes for customer consent and stronger oversight and controls.

  • Investment of more than 800,000 hours in learning and development for retail bank employees to support cultural, process and policy changes, with training ongoing.

  • Reorganization and centralization of key Company functions, including Risk, Human Resources, Finance, Technology, and Data.

  • Even before today’s establishment of the Fair Fund, agreement to pay more than $500 million to customers and investors as remediation for harm that resulted from the historical Community Bank sales practices.

Are you ready to retire?

“Retirement is wonderful if you have two essentials – much to live on and much to live for.” – Author Unknown  

Before you retire, it is a good idea to have an estimate of your income and expenses. We recommend tracking your expenses two to three years prior to your retirement in order to quantify how much income you will need in retirement. For more information on expense tracking tools, review this article on the Best Expense Tracker Apps of 2020.

Test your knowledge —> take the AARP Retirement Quiz

Once you have a handle on your expenses, you can adjust for any expected lifestyle changes you plan to make in retirement. Lifestyle changes might include downsizing your home, moving to one of the no income tax states, purchasing health insurance, traveling, joining a country club, or finding a part-time job.

Keep in mind that for every $1 million in your retirement savings, you can expect to generate approximately $40,000 in annual income applying a 4% withdrawal rate. A simple rule that you can use to compute how much money you need in retirement savings is to multiply your expected annual expenses by 25. For example, if you determined that you will have $120,000 in annual expenses, then you would aim to have at least $3 million ($120,000 x 25) in retirement savings to be able to generate the income you need using a 4% withdrawal rate. Be sure to account for tax liabilities when estimating your portfolio’s investment income. If you need help with tax planning, you can search for a CPA or enrolled agent in your area.

You can check if your retirement savings will generate the income you need by using this retirement income calculator from The Vanguard Group. It allows you to include other income sources such as Social Security and pension benefits. The Social Security Administration offers taxpayers an online estimate of your retirement benefits.

The government wants you to spend your retirement money. For this reason, the IRS requires that you take a required minimum distribution (RMD) from your retirement account. An RMD is the minimum amount you must withdraw from your retirement account annually. You generally have to start taking RMD withdrawals once you reach the age of 72. The RMD age of 72 just went into effect in January 2020, previously it was 70.5 years old. Keep in mind that once you turn 72, you have until the following year by April 1st to make your first withdrawal. For each subsequent year, after your first, you must make your RMD withdrawal by December 31st. Missing an RMD deadline can result in steep penalties from the IRS. To track the timing of your RMD, there are free worksheets available to you. For a deeper dive into RMD planning be sure to read the Internal Revenue FAQ site and speak with your tax adviser for specifics on your particular situation. As with most things in life, timing is everything.

Planning is the key to a smooth transition into retirement. Knowing your expenses and income, will enable you to make the necessary lifestyle adjustments for long-term piece of mind in the next phase of your life. The Brinker Fixed Income Advisor Model Portfolios can help you achieve your goal. Our portfolios, aim to support a 4% to 5% withdrawal rate over the long-term. Here is our performance through December 31, 2019:

Model Portfolio      1-Yr       3-Yr         10-Yr      CAGR

Aggressive              9.3%    14.4%       61.1%       4.8%

Moderate                 8.4%    12.8%      52.8%       4.4%

Conservative          6.2%    10.3%       44.9%       4.0%

Tax-Exempt             5.3%    11.5%      39.9%       3.6%

Total Return through December 31, 2019. Past performance is not a guarantee of future results. CAGR: Compound Annual Growth Rate(14 yrs)

A few more questions and answers

“Who questions much, shall learn much, and retain much.” – Francis Bacon


Q. Should I buy Wells Fargo shares right before it goes ex-dividend?

A. No. When a stock pays a dividend, the share price is lowered on the ex-dividend date to reflect the upcoming dividend payment. For example, if we assume a $100 stock that pays a quarterly $1 dividend ($4/yr = 4% dividend yield), and you were to buy the stock the day before it went ex-dividend, the stock price would open $1 lower at $99 on the ex-dividend date to account for the upcoming dividend payment. That dividend is probably taxable, so you would be getting $1 of your own money back with a tax liability attached to it. I know there are some brokers that push this strategy of buying stocks right before they go ex-dividend as an income method, but I am not a believer. As far as I can tell, you are just getting a small portion of your own money immediately returned to you with a dividend tax liability attached to it, which seems like a bad idea. I would rather buy the shares after the ex-dividend date than before it.

Also, in the case of our Wells Fargo recommendation, we are not buying it just for the dividend. The company is buying back approximately 11% of its shares annually in addition to the 4.3% dividend. We recommend timing your share purchases during periods of stock weakness. We expect the recovery in Wells Fargo will take a few years as we explained in our original post.


Q. Per your KMF Kayne Anderson Midstream/Energy Fund recommendation and understanding that you cannot give tax advice, can you make a general statement about the tax characterization of the KMF distributions?

A. Sure. Let me start by saying that you are correct — I cannot give tax advice. Do your own tax analysis or check with a CPA or enrolled agent regarding your tax liability for distributions. However, I will provide a general explanation based on my understanding of the information KMF published. KMF issues a 1099-DIV, not a K-1. According to them, the “distributions are treated as a taxable dividend (qualified dividends) to our common stockholders to the extent of our current and accumulated earnings and profits.” In 2019, KMF estimates that 100% of the distributions are nondividend distributions (Return of Capital), which means there should not be any taxes owed. Instead, return of capital distributions lower your cost basis. For 2020, KMF estimates that 90% of distributions will be nondividend return of capital and 10% will be qualified dividends. This is only an estimate and it could change. At tax time you will receive a 1099-DIV with the breakdown of the distributions.

I’ll add that KMF shares still look attractive. The closed-end fund trades at a -13.65% discount to its net asset value and it pays an 8.95% distribution yield. Obviously energy stocks and MLPs remain out of favor with investors and the recent coronavirus scare has added to the list of challenges. However, for investors with a very high risk tolerance, we think the KMF shares are attractive for purchase. The next scheduled monthly KMF distribution has an ex-date of Feb 19, a record date of Feb 20, and a payment date Feb 28.

Share Brinker Stock Advisor

“A bank is a place that will lend you money if you can prove that you don’t need it.” – Bob Hope

Wells Fargo offers an attractive 15% shareholder yield.

What is the first thing that comes to mind when you hear the name Wells Fargo?

Scandal? Fraud? Fake Accounts? Probably some combination of these. Wells Fargo management made some terrible mistakes over the past several years and the stock has suffered. Wells Fargo’s stock price (Symbol: WFC) has fallen nearly 30% over the last two years while the stock market and financial stocks have rallied. Today Wells Fargo stock trades around the same price as it did in early 2014, nearly six years ago.

We believe the time is right to invest in Wells Fargo again. In our opinion, the storm surrounding Wells Fargo’s poor management practices is subsiding. On the bright side, most of Wells Fargo’s customers have remained with the bank despite its problems. The new CEO Charles Scharf is determined to fix the management problems, settle litigation, and repair the bank’s relationship with regulators.

The most appealing metric we see at Wells Fargo is the shareholder yield. If we look at Wells Fargo’s latest capital return plan (dividends and share buybacks), we see that Wells Fargo offers a 15% shareholder yield. This shareholder yield includes a 4.2% dividend yield and a $23 billion share buyback program that will reduce the total number of shares by more than 11%. Wells Fargo is well capitalized and should be able to maintain a generous capital return plan for the foreseeable future.

Once Wells Fargo settles remaining litigation and makes the necessary investments to satisfy regulators, the company plans to reduce expenses. While this is going to take some time to play out, investors will be compensated to wait. Wells Fargo pays a $0.51 quarterly dividend ($2.04/yr) and the ongoing share repurchases should support the stock in the mid $40s. We think the stock is attractive for purchase in the mid-$40s.

Wells Fargo is operating under a $1.95 trillion asset cap imposed by the Federal Reserve for its past sins. CEO Scharf has not hinted at when the asset cap might be removed, but we think it could be lifted by the end of 2021. In the meantime, the asset cap is allowing the bank to focus on improving the quality of its loan book. Wells Fargo remains the #1 mortgage originator in the United States.

In summary, here are the actions and outcomes we see moving forward:

  1. Settlement of remaining regulatory & legal items == clarity on liabilities.

  2. Expense reduction plan == lower costs, higher profits.

  3. Termination of asset cap == return to growth.

  4. Sentiment shift == analyst ratings get more favorable.

  5. Shareholder yield == 15% per year to wait.

We think Wells Fargo presents an attractive opportunity for patient investors willing to endure the near-term challenges, for long term gains. If management executes its plan we should see earnings per share increase to more than $6 per share in 2021, which could lift the share price into the $60s. We are also likely to see the dividend increase.

Note: We recommend that individual stock positions are limited to 4% of your overall portfolio in order to avoid specific company risk. Wells Fargo is scheduled to go ex-dividend on February 6th 2020 with a payment date of March 1st 2020.

A nickel ain't worth a dime anymore. -Yogi Berra

How to earn a return on your cash.

In an era of ultra low rates it is challenging to earn a decent return on the cash held in your investment account. Brokerage firms offer a variety of money market and savings products that have yields ranging from zero to two percent.

Our favorite money market fund is the Vanguard Prime Money Market Fund (Symbol: VMMXX). This fund “seeks to provide current income and preserve shareholders’ principal investment by maintaining a share price of $1.” It has an expense ratio of 0.16%, a minimum investment amount of $3,000, and a 7-day SEC Yield of 1.67%. The fund pays a monthly distribution and permits check writing with a minimum per check amount of $250.

If you are not able to purchase Vanguard’s VMMXX money market fund at your brokerage, you might be able to find a reasonable substitute. Schwab Value Advantage Money Fund (Symbol: SWVXX) is available at Schwab. Fidelity Money Market Fund (Symbol:SPRXX) is available at Fidelity. Both of these funds have SEC Yields about 20 basis points lower than Vanguard’s VMMXX fund and expense ratios about 20 basis points higher.

If you are unable to find a money market fund that offers an attractive yield (TD Ameritrade customers!), you should consider using one of these exchange-traded fund (ETF) products. PIMCO Enhanced Short Maturity (Symbol: MINT) is our favorite. The fund “is designed to provide clients with capital preservation, liquidity and stronger return potential relative to traditional cash investments”. It has an effective duration of 0.45 years and a 30-day SEC Yield of 1.91%. Now that many brokerage firms offer zero trading commissions, this fund is even cheaper to own as you can avoid those transaction fees. The expense ratio for this fund is 0.36%.

Another ultra-short ETF to consider is the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (Symbol: BIL). This fund seeks to match the performance of the 1-3 month Treasury Bill Index. It has a duration of just 0.10 years and a 30-day SEC Yield of 1.37%. The expense ratio is very low at 0.14%.

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