As the markets hit a rocky patch starting Friday, Wells Fargo had its own surprise.
Outgoing Federal Reserve Board Chair Janet Yellen announced that the bank was banned from growing until it shows that it has resolved certain shortcomings. According to Wells Fargo, this could cost it as much as $400 million in profits this year.
Its stock is taking quite a hit from this news. And what about its 14,500 advisors?
“While operating under this constraint, we are open for business, and we will continue to serve our customers’ financial needs, including saving, borrowing and investing,” said CEO and President Tim Sloan in a statement on Friday.
According to the bank, the cap impacts assets on Wells Fargo’s balance sheet and not assets in brokerage or related accounts.
But how willing will wealth management clients be to give advisors new money or become new clients in general?
“They are making a series of statements, and their efforts to change are sincere,” said recruiter Danny Sarch of Leitner Sarch consultants. “But department by department by department, they are showing that they do not care to put the client first — from mortgages to car loans to bank loans.”
While Wells Fargo Advisors has not been found guilty of any misbehavior by authorities or regulators, clients of the unit have watched the scandals unfold on the banking side. “To think that referrals within the bank, i.e., cross-selling, are as robust as they were before all this [news] broke is naïve,” Sarch explained.
For an advisor who is in the process or considering moving to WFA, “How can you explain that this benefits the client, and how can you make that argument? It’s tougher than ever right now,” the recruiter said.
And for existing advisors who are trying to add assets from current clients and prospects, Wells Fargo is, once again, dealing with “headline risk.”
“Compliance is dominating the firm … and it’s both a distraction and an impediment,” Sarch explained.
“Just when you think it is over, it is not — there is always more to the story,” he said. “I feel for the advisors that are not part of [troubled units] of the their firms at all.”
The recruiter is also concerned that Wells Fargo won’t be able to invest in its different businesses as it could have before the Fed’s consent order.
Sloan has said that the firm will move to comply with the order “while creating headroom to continue to serve our customers and grow other asset categories.”
Overall, bank analyst Richard Bove of Vertical Group says Wells Fargo has not increased its assets substantially over the past six quarters and hence the decree should have a limited impact.
As for wealth management, the business is changing for Wells Fargo and its competitors as cheap ETFs dominate the field. “It means you have to sell mortgages, make loans and the like,” he said. That, and not the decree, will impact the unit’s performance.
Keefe, Bruyette & Woods analyst Brian Kleinhanzl has more of a mixed view.
“The bottom line is that the [cease and desist] order will mean Wells will have a harder time maintaining market share and will have to compete more on price or credit terms versus peers, in our view,” he wrote in a note on Monday.
Still, Kleinhanzl added, “We are not expecting another shoe to drop from a regulatory perspective, but there is increased uncertainty about when the C&D will be resolved.”
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