Join Motley Fool's Gaby Lapera and senior banking specialist John Maxfield as they discuss Wells Fargo's (WFC 1.33%) long-standing practice of cross-selling, how it has affected its customers in the past, and why the banking giant is still an attractive investment. Then Gaby and John take a look at the current housing market, and how local housing trends affect the overall national outlook. And because it's nearing the end of the year, our analysts have some tips for end-of-year portfolio and 401(k) goals that should be on every investor's "to-do" list.
A full transcript follows the video.
Gaby Lapera: Hello everyone, and welcome to Industry Focus, financials edition. I'm Gaby Lapera, and John Maxfield is joining us on the phone. Maxfield and I are still attempting to recover from Thanksgiving. My turkey hangover is real and it's bad.
So today, as a result-
John Maxfield: Sometimes, hangovers can last multiple days, I've heard. I've heard that from somebody.
Lapera: Does, like, the tryptophan just build up in your system, and it just doesn't go away? Is that what it is? I'm just stuck with it for life, like mercury poisoning?
Maxfield: Yeah, it's cumulative. The thing is, Gaby, is that, what actually kills most humans is the accumulation of that in your body over 80 or 80+ years.
Lapera: That makes a lot of sense.
Maxfield: It's science, Gaby. We can't, you know, do you want to argue about the science?
Lapera: Did you know that I got my degree in biological anthropology? This is killing me a little bit inside right now.
Maxfield: I don't even know if that's science. That's how little I know about science.
Lapera: Oh my gosh. Listen, so today we're going to be doing a grab bag because my, I don't know about you, but my attention post-turkey is really short. So, I couldn't do a long story today. So I hope you're excited about mini segments instead.
Let's talk about this Wells Fargo article on the front page of the Wall Street Journal. It's about cross-selling. Maxfield do you want to explain what cross-selling is?
Maxfield: Yeah, so just a little bit of context. So Wells Fargo, right? I mean, anybody who listens to this show regularly knows that I'm a pretty big fan of Wells Fargo. I mean, this is, like, an amazing company, right? When you look at its metrics, and particularly over the years, and particularly when you consider that it's a bank, and the troubles that most banks went through during the financial crisis.
Well, it turns out -- well, one of the things that makes Wells Fargo such an amazing organization from an investor's perspective is the fact that it sells multiple products to every customer. I think its average is like 6.13 products per retail customer. And most other banks are, even though they don't report those figures, they are presumably much lower than that. And it's that selling multiple products to the same customer -- whether it's checking account, credit card, mortgage, what have you, wealth management product -- it's the selling of those multiple products to that same customer. That is what cross-selling is.
Lapera: Right, and it's actually really impressive. You stated that the average Wells Fargo customer has around 6.17 accounts with them. Back in 1999, that was only three accounts on average per customer, and I believe that their goal is to have eight per customer.
Maxfield: Yeah, that they call it the... and I think I'm probably going to totally get this pronunciation wrong, but this is a former CEO Dick Kovacevich, who was really the force behind the merger of equals that brought, that gave us the Wells Fargo that we know today. And he came out with this initiative called, I think, they called it, The Great Eight. But in the Wall Street Journal article, they are referring it to as The Gr-8 like Gr, and then dash 8. Gr-8.
Lapera: Even bankers have a sense of humor.
Maxfield: Yeah, so at least I hope that they do that as a joke. Because maybe their sense of humor is like my knowledge about science: They don't know enough about humor to even know if that's funny or not.
But anyways, Kovacevich came out with that, and that really since then over the last almost two decades, that has really been able, that has really pushed their margins, and put Wells Fargo in a position to outperform the vast majority of its competitors both in terms of stock price, and in terms of growth in its dividend share buybacks, and things like that.
Lapera: Absolutely. But they've run into a little bit of trouble with this practice, and like you, must be sitting there thinking as an investor, this is great, this is a really good way for them to grow their business. But back in May, a lawsuit was filed in LA against the bank claiming that they were engaging in predatory-kind-of sales tactics, like high-pressure tactics to get people to sign up, to open accounts that maybe -- like one example they gave was they were trying to get customers who maybe didn't speak the best English, so they didn't really understand what they were signing. Or trying to get customers -- one story that was told in the Wall Street Journal was they set up outside of the blood bank where people were going to sell their blood, knowing full well that those people probably would get their accounts frozen. But it was so important to the Bank of America [editor's note: this should be Wells Fargo] employees to get sales, that they were engaging in these tactics that maybe aren't above board.
Maxfield: Yeah, and let's be honest, right Gaby? If you think back, so I still think Wells Fargo is amazing these things aside. But let's just think about the bank industry over the last two decades. I mean, they really haven't done some great things, right? I mean, if you think about -- my favorite example of what the -- and this is with the entire bank industry did, OK? You would go in, right? I can't remember what the statistic is, but something like 40% of bank customers at the biggest bank live from paycheck to paycheck. Which means that their account balance is constantly going down to zero, if not going to the negative.
Well, for many years, I don't know how long -- but for many years, what the banks did is they would take your daily transactions from your debit card, and they would reorder them chronologically. So they would put the biggest one first, so then that would increase the probability that you would overdraft. So if you had, like, 10 transactions in a day, and let's say nine of them were for $1.00, and then one of them was for $300, and the $300 transaction was last, they would put that at the beginning. And if that kicked you into overdraft, then you'd have those -- not only would you have the overdraft on the big charge, but you'd have those nine subsequent overdrafts, as well. As opposed to if they didn't rearrange those chronologically, you would just have the one final overdraft at the end.
So that's just an example, and then, you know, they sold credit-card products that allegedly helped protect you, or would take care of your payments, or things like that, if you got sick or injured at work. And it turns out that you really didn't get absolutely anything from these services at all, so all the banks got in trouble for that. And it's just this whole pattern of behaviors that all of the banks got into.
Lapera: Absolutely.
Maxfield: That consists of -- really to be perfectly blunt about it -- exploiting their customers. Now this is kind of where Wells Fargo has been caught up. But it's important still, particularly at this early stage in this whole process, that we keep in mind that these are stories that could be coming... and I don't doubt that Wells Fargo has a very aggressive sales culture, right? They're known for cross-selling. You've got to push your employees to sell if you want to cross-sell. That's just how it works, right? But whether or not it actually crossed the line, and whether this is going to change the investment theory on Wells Fargo is something I really, really doubt. It's not going to cause -- I would be surprised if this thing cost tens of billions of dollars for Wells Fargo.
Lapera: Right, and that is one place that Wells Fargo is ahead of a lot of the other big banks -- is that they didn't have really any large settlements that they had to pay post-2008 financial crisis.
Maxfield: Yeah, and I mean it made a huge difference. I think that Bank of America's tally -- and this is from Bank of America itself -- was $195 billion from the crisis -- $195 billion is what the crisis cost them. So the fact that Wells Fargo has largely avoided all that, yeah, it could have a few hundred million dollars here and there, and it shouldn't be doing things that, if they really are pressuring, I mean, I think we can all agree with that -- that they shouldn't be doing those things. But as an investment, this is still an incredibly solid bank.
Lapera: Yeah. I figure we should probably close with a quote from Wells Fargo, which is from Mary Eshet, which is their spokeswoman. "Wells Fargo's culture is focused on the best interest of its customers in creating a supportive, caring, and ethical environment for our team members." Which -- that is what she is paid to say.
Maxfield: Yeah, you don't think that she wanted to come out and say, "We tell our customers there are employees to make sure the customers buy things whether they like it or not."
Lapera: No, actually... so speaking of products, particularly mortgage products, pending home sales were up 2.90% from last year in October, and they rose about 0.20% from September this year, which is less growth than was expected. But growth either way is a good sign, right?
Maxfield: Yeah, I mean in terms of the volume, it's absolutely a good thing, yeah.
Lapera: Yeah, I mean, typically, people don't buy homes if they're feeling economically insecure. So this is a sign that people are, have faith in the economy as it is now, and that they're getting ready to settle down and plunk down roots. Did you also see -- I don't know if you saw this -- an article a little bit ago about the Case-Shiller index, which is, it's basically an index that tracks home prices. And it said that home prices had reached pre-recession levels again, and they're just far too expensive. But that doesn't really take into account inflation, and there's a new analysis released by CoreLogic, and it says that homes have not reached pre-recession level when you take into account inflation.
In fact, they're about 20% below what they were pre-recession when you account for inflation. And they're thinking that it will take 17 years to reach the same price point. So it's good news if you're thinking about buying a home.
Maxfield: Not if you're thinking about selling.
Lapera: Not if you're thinking about selling, no.
Maxfield: The thing here is, Gaby, that when I read these statistics -- so let's talk about housing. So you have housing is, these studies, they throw, oh you know -- it's going to be this many years before we get back. But it's important to keep in mind that the housing is actually a local market more so than a national market. Let me just give you some statistics to kind of solidify this in your head.
So nationwide, so I think you said that what CoreLogic said, that they're 20% down, if you add in inflation?
Lapera: Yeah.
Maxfield: So if you look at -- and that's just the same statistics that I have -- but if you look at individual cities, you have LA, which is -- now this is not taking inflation into consideration, this is just on a nominal basis -- LA home prices are still down 14%. Houston, since the peak in 2006, home prices are up 30%.
Lapera: I don't even want to know. What are they for DC? Do I want to know?
Maxfield: I don't know, I didn't look. I used to live there, too. It's too depressing. Boston is flat. Phoenix is down 31%; Vegas is down 38%. Portland, where I live, we're way up. Denver's up. So you have some places that are way up, some places that are way down. So it's just important to keep in mind that, when you're talking about housing, sometimes you've got to look beyond that national number to also kind of take into consideration that some places have much-higher escalations on all prices and drops after the crisis.
Lapera: That's true. So I guess, keep that in mind when you're home buying.
Maxfield: Let me make one more point, Gaby. That what's going on in the housing market right now, with the increases in home prices in certain cities, the question is, well, it's not like we're getting a lot of great news about the economy, right? I mean, you have the Federal Reserve isn't increasing interest rates. It still has not increased interest rates because the economy isn't going, inflation is high enough, unemployment is basically where they want it.
Lapera: But who knows, maybe soon. If we look into our crystal ball on the Fed interest rates.
Maxfield. Exactly. I'm sure we'll talk about that a million more times over the next few months.
Lapera: Who knows? Maybe it will go up in December, and we'll be really excited. We've been saying it's going to go up for, I think like six months.
Maxfield: I know, exactly [...] 16 months maybe? But the question is, what is going on with housing? And really, what is going with housing is this. The inventory of available homes for sale is still really low across the country. I think it's -- so at the current sales pace, it will take 4.8 months to get through the current inventory of existing homes for sale.
Well, the rule with housing is that, if the inventory is equal to less than six months worth of sales -- which it is because it's at 4.8 right now -- then housing prices will increase. Whereas, if it's above six months worth of sales, then it will go in the other direction. So that what's going on in those local markets where you have home prices accelerating really quickly, and then those home prices like Vegas and LA, those places like that, where home prices are still way low. That's just a residual of the financial crisis.
Lapera: So, I don't know if you noticed, but it's almost December, which means it's time to start thinking about end-of-year stuff that you ought to do if you have an investment portfolio.
Let's start with tax-loss harvesting. Do you want to explain a little bit about what tax-loss harvesting is?
Maxfield: Yeah, so let's say that Gaby invests in, I don't know Gaby, like what, Apple? Give me a company.
Lapera: Let's go with Apple.
Maxfield: Let's go with Apple. Let's say Gaby buys shares of Apple, and then shares of Microsoft. And then during the year, her shares of Apple go up 30%, and her shares of Microsoft, let's say, go down 30%. Well, let's say that Gaby needs to sell her Apple stock, but she doesn't want to pay taxes on that gain. Well, what she can do is, she can sell her Apple stock and take that gain, and then also sell her Microsoft stock, take that loss, and then you can offset it. And that's what tax-loss harvesting is. It's selling losers to offset your winners for tax purposes.
Lapera: Absolutely. So a few things that you want to keep in mind with tax-loss harvesting is: One, you can apply up to $3,000 a year in capital losses toward lowering your total adjusted gross income -- which is great. But you can also do the same, the thing that Maxfield was talking about, where you take your losses and offset your gains. But if you're going to do that, you have to keep in mind that they have to match. So if you're offsetting short-term gains, you have to do that with short-term losses. Does that make sense?
Maxfield: Right.
Lapera: And if you want to do that, you can do, too, with long-term gains and long-term losses. It works for that, too. Of course, if you have a short-term loss, for example, of $8,000, and only $2,000 in short-term gain, then you can apply the remaining, say, $6,000 to your long-term gains if you have that.
Maxfield: Yeah, yeah. And it's, it really is when you're talking about investing -- any time you can reduce your costs and taxes, or one of those costs, you're effectively increasing your returns. So anything that you can do in that regard, and tax-loss harvesting is absolutely one of them. It is a good thing for investors to keep in mind just as a tool in their toolkit.
Lapera: Absolutely. So other things that you want to think about before you sell is, check your cost basis before selling. Maybe that will influence you either way. You obviously want to sell depreciated investments if you're going to do tax-loss harvesting, but you want to try and get rid of the ones that don't really fit in with your strategy -- whatever your strategy may be. And you obviously want to hold on to stocks that fit your long-term goals.
Maxfield: Yeah, and to that point, I'd just like...
Lapera: Don't sell things willy nilly is what I'm saying.
Maxfield: Exactly, and I suspect that, Gaby, you were going to bring this up, but it can even be a part of rebalancing your portfolio. You know, looking at your portfolio at the end of the year, seeing where your stocks, how they've changed, seeing what percentage certain socks are taking up of your portfolio. And if some are taking up more than others, you want to take those gains, or take those losses to offset those gains -- it can all kind of factor into that rebalancing of your portfolio.
Lapera: Absolutely. And just to throw this out there, the Motley Fool philosophy is, of course, to always look for diversity, and to look for long-term investments that you really believe in. So just keep that in mind when you're rebalancing your portfolio.
Another thing that you should think about doing is making a contribution to your tax-advantaged retirement account. So it's 401(k)s, IRAs -- the 401(k) limit for 2015 is $18,000, and you can deposit an additional $6,000 if you're over 50; and for IRAs, the yearly limit is $5,500, and $1,000 more if you're over 50 years old.
Maxfield: Yeah, and just use these, right? If you can use the tax-advantaged retirement account, use them, right? Because... let's just give an example. Let's say you can put $10,000 into it -- your marginal tax rate is 25%, or let's say your average tax rate is 25%. Just by putting that $10,000 in income and transferring it over into a different account that you still control -- that you can still see on your computer screen -- you're going to save yourself $2,500 in taxes. So it's basically an immediate 25% return on your money.
So again, just like tax-loss harvesting, reduce your taxes. That's really what you should be thinking about as an investor right now.
Lapera: Of course, that's only for the traditional accounts. With 401(k)s, you're going to be taxed up front.
Maxfield: Exactly, exactly.
Lapera: Just keep that in mind.
Maxfield: Yeah, and that's a really important point to keep in mind. Yeah, thank you Gaby; that was a really important point. Roth, you're not taxed when you withdraw, but you are taxed on your income in the current year. But again -- just if you can use your retirement savings accounts, use them. If you can't, then you can't.
Lapera: Right. I mean the other thing is, with 401(k)s, if you have one, most employers have matches. So you just want to take advantage of that matching. I mean, even if that doesn't help you necessarily now, because there's withdrawal penalties. Down the road, it'll help you quite a bit.
Maxfield: Yeah and the thing is, is that what's so great about America, one of the things that's great about America is we have this incredibly powerful economy. And that economy is powered by our consumers, right? So spending as much money as they can possibly spend. So for the country, it's a really good thing if everybody's going out and spending all the money. But for an individual, you need to save. And I know saving is hard, and things like that, but these are vehicles that can make savings easier because they can accelerate your savings by reducing your tax liability.
Lapera: Absolutely. And one thing that you can do to make saving easier is, you can set up a direct deposit into the account -- so you don't even see the money. It doesn't even go into your savings account, so that way, you don't even have to think about it, or your checking account.
Maxfield: Yeah that's smart.
Lapera: So basically the theme of this is, get a sense of where you're at with tax liability, make sure you sock some stuff away for retirement, and get excited for the new year.
Maxfield: Love it, and watch... don't eat too much turkey.
Lapera: Don't eat too much turkey. Do you have anything else?
Maxfield: That's all I've got for today. Happy holidays to everybody.
Lapera: Alright then. As usual, people on the program may have interest in the stocks they talk about, and the Motley Fool may have recommendations for or against. So don't buy or sell based solely on what you hear.
Thank you very much for joining us. I hope you guys enjoyed this week's episode. Write to us at [email protected] if you have any ideas about what next week's podcast should be about. Thank you, everyone, and have a great day.
