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April 5, 2018

Wells Fargo Sales Push Extended to Wealth Unit, Ex-Workers Say

by Bloomberg News
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Wells Fargo
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Cooper Neill/Bloomberg via Getty Images

(Bloomberg) –Credit card and savings customers may not be the only ones who were misled by Wells Fargo & Co.

Some clients of the bank’s wealth-management division were steered into investments that maximized revenue for the bank and compensation for its employees, according to several people familiar with the unit and documents reviewed by Bloomberg. Those investments weren’t always in the best interests of clients, the people said. They included estates, trusts and loans, according to one of the people and the documents.

Wealth advisers as recently as 2016 were given ambitious quotas and could earn extra pay by steering clients into loans and accounts with recurring fees, said the people, who included one current and five former Wells Fargo advisers. To hit certain goals, some advisers plugged data into financial planning software that they knew would recommend portfolios their clients already owned, two of the people said.

The quotas and incentives driving the wealth unit’s strategy were similar to the inducements that led employees in the bank’s retail business to create roughly 3.5 million potentially bogus accounts, these people said. The scandal over fake accounts, disclosed in September 2016, led to the firing of 5,300 employees and the ouster of the bank’s chief executive officer.

Responding to questions, Wells Fargo acknowledged that the wealth-management unit used such incentives until 2017 but said those incentives didn’t harm clients. The bank is nonetheless reviewing its wealth and investment-management division’s activities, it added.

Any assertion that its past or present compensation plans did “anything other than incentivizing positive client outcomes is simply incorrect,” bank spokeswoman Shea Leordeanu said.

The scrutiny of Wells Fargo’s wealth-management business offers an inside look at how sales incentives are sometimes structured at big financial institutions. These inducements are usually legal and are common among banks, which typically regard them as closely held secrets.

The question for U.S. authorities is whether Wells Fargo, which has already been sanctioned by the Federal Reserve Board over the fake-account scandal, used incentives that either weren’t properly disclosed or breached its duty to clients.

The Justice Department and the Securities and Exchange Commission are investigating whether the unit inappropriately sold clients in-house investments, a person familiar with the probes said. Spokeswomen for the Justice Department and SEC declined to comment.

Internal Probe

Wells Fargo disclosed federal inquiries in a March filing without naming the agencies and said its board was reviewing its wealth-management operations at the government’s request. The bank is examining whether workers made inappropriate recommendations involving 401(k) rollovers, alternative assets, estates and trusts, it added.

The wealth-management unit is “making significant progress in our work to identify and fix any issues, make things right, and build a better, stronger company,” Leordeanu said in a written statement. She said the early 2017 changes to the pay structure eliminated rewards for promoting certain products in favor of paying for overall revenue growth.

Wells Fargo Advisors, the main retail arm of the wealth-management unit, stands by its pay plans and reviews them regularly to ensure they’re working in the best interests of clients, Leordeanu said.

Wells Fargo Advisors manages $1.6 trillion in client assets and employs 14,500 advisers who work at about 5,360 of its 6,000 retail branches, as well as in stand-alone investment offices for wealthy clients.

The new details about Wells Fargo’s wealth-management business in recent years by the current and former employees could add to the bank’s woes. Wells Fargo shares have lost about 13 percent of their value this year as an S&P financials index has declined by 1 percent.

The bank is also continuing to field questions from local, state and federal authorities, in a domino-line of probes set off by its 2016 retail banking settlement. In February, the Federal Reserve took the rare step of sanctioning Wells Fargo, saying it can’t expand until it fixes oversight lapses.

Bank Firings

Internal documents show that, in the past, some employees in retail bank branches could earn thousands of dollars for referring a client to a bank unit that handles trusts and estates, according to a person who has reviewed the documents.

Certain other retail employees were paid flat $25 fees for referring a client to investment advisers, the person added. A 2014 study by Gallup Inc., the polling company, said that employee sales incentives were common in bank branches.

For referrals to the trusts and estates unit, some retail bank employees received as much as 15 percent of first-year revenue on accounts of up to $10 million, Leordeanu acknowledged when asked about the incentives. The investments were often placed in a fee-based product known as a managed account. A bank investment strategist or trust adviser, rather than the client, picks specific investments in those accounts. Some customers prefer these managed accounts because they prefer to pay a fee instead of trading commissions.

A 2015 investment unit pay grid reviewed by Bloomberg indicates that advisers received credits for having at least 60 percent of client assets in fee-based accounts or for generating at least 80 percent of revenue from those accounts, rather than from commission-based brokerage accounts.

Planning Software

The push to sell was also aided by technology. When customers sat down at Wells Fargo Advisors, the reps across the desk were instructed by their managers to run them through the bank’s Envision financial planning software. The software relies on the same sort of Monte Carlo financial planning simulations used at other banks to estimate clients’ chances of hitting financial goals, according to the internal pay grid as well as one current and one former adviser.

Some advisers would run the Envision simulations without their clients present by plugging in numbers they knew would recommend investments that clients already held, one former adviser said. At least one manager actively encouraged that behavior, another person said, on the belief that owning more Wells Fargo products would make client assets “sticky” and unlikely to leave the bank.

The bank says its use of the Envision software didn’t disadvantage clients. “If anyone were to create consistently low-quality plans, we take action,” Leordeanu said.

Industry Practices

Many of the practices described by current and former Wells Fargo employees are similar to those that have drawn regulatory scrutiny at other banks.

In-house investments and managed accounts were at the core of JPMorgan Chase & Co.’s agreement three years ago to pay a $367 million asset-management settlement to the SEC and the Commodity Futures Trading Commission over allegations that it failed to properly inform clients that it was selecting investments based on their profitability to the bank. Some of those investments involved hedge funds, a type of alternative asset, which paid the bank to recommend them to asset management clients.

JPMorgan acknowledged failing to inform customers of the conflicts and agreed to changes. JPMorgan’s lapses were brought to light with the help of whistle-blowers who provided details of its internal practices to regulators.

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Comments (6)
  • on Apr 5 2018, Deeann Griebel says:

    wow–a CURRENT employee is providing evidence??! now that takes courage../

    > Reply to Deeann Griebel
  • on Apr 5 2018, Ron Edde Director of Recruiting and Mergers says:

    It is sad that in our politically correct world nowadays, people who make a living by selling products are demeaned because they paying attention to opportunities to make more money by selling more stuff. Of course people in the securities industry refer clients to other segments of their firm that might be of value to the customer (such as loans, trusts and estates, etc.) and ideally they prefer to share in any fees that the firm generates from providing that service. There is nothing inappropriate or illegal about that practice, and most smart firms offer incentives to employees to drive that.

    Does UBS do this? Of course. Morgan Stanley? Absolutely. Bank of America/Merrill Lynch? They did it today when I went in to make some changes to a travel account and the teller saw my balance. It’s getting tiring reading about “ex-employees” who are suddenly overcome with righteousness and decide to vent their frustration over being fired by blowing the whistle on something they saw no problem with and likely participated in while gainfully employed…and I am talking about those from every firm.

    Regulators will let us know if and when they uncover any illegal or deceptive practices that need to be dealt with, as they did with the checking accounts being improperly opened at Wells Fargo. To date, however, no wrongdoing has been found in Wells’ wealth management arm, and until such time that actually happens, disgruntled ex-employees have about as much credibility as porn star Stormy Daniels.

    > Reply to Ron Edde Director of Recruiting and Mergers
    • on Apr 5 2018, FormerWFA says:

      Let me make this clear as someone who was there – the FA’s payout was dependent on how many mortgages they referred, how many secured backed loans they did, etc. Clients aren’t told about that incentive to the FA’s and we all know that 100% of all advisors act in the best interest of their clients, right?

      > Reply to FormerWFA
      • on Apr 5 2018, Ron Edde Director of Recruiting and Mergers says:

        No securities laws were violated by “referring” a mortgage or helping a client get a securities-backed loan…unless the advisor opened an application or extended a loan without the clients’ knowledge or authorization. Furthermore, there was no rule in place at the time requiring disclosure that the advisor might be compensated for such referrals. Not sure what your point is here.

        > Reply to Ron Edde Director of Recruiting and Mergers
  • on Apr 5 2018, FormerWFA says:

    I thought you guys were working on a story about this a year ago when I kept saying this wasn’t just on the bank side. You reached out to me and I answered questions. Too bad you didn’t do the story you said you were going to do.

    > Reply to FormerWFA
  • on Apr 5 2018, Dee says:

    If a broker leaves a firm with a P-Note, will the broker get a W-2 for the full amount the following tax year?

    > Reply to Dee

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