Two weeks after Wells Fargo said it was reviewing some overcharges and incorrect wealth management fees, as well as possibly “inappropriate” referrals and recommendations affecting 401(k) rollovers to its wealth unit, the role of regulators in the probe of these practices is becoming clearer.
The Department of Justice and Securities and Exchange Commission are involved, and agents with the Federal Bureau of Investigation have been speaking with some employees of the wealth unit in Phoenix, according to a report in the Wall Street Journal. This development, though, was contradicted by Jonathan Weiss, a senior vice president in Wealth and Investment Management, according to a memo he sent out to the wealth unit.
Wells Fargo declined to comment on the matter, but referred to a statement in its annual report: “Our top priority is to rebuild trust with all of our stakeholders. … We are making significant progress in our work to identify and fix any issues, make things right, and build a better, stronger company.”
The DOJ asked Wells Fargo for an independent review of practices at its wealth unit after whistleblowers revealed problems there, the Journal said, adding that the current investigation by the DOJ and SEC is separate from the bank’s own inquiry. Employees have pointed to issues with the bank’s own investment products.
“Now the investigation is finally hitting [its] advisory business,” said recruiter Danny Sarch of Leitner Sarch Consultants, in an interview. “This is a big deal. Earlier investigations were related to banking.”
The latest details about the wealth-unit investigation come just days after Wells Fargo said CEO Tim Sloan received a 36% bump in pay to $17.4 million — a move heavily criticized by Sen. Elizabeth Warren and others — and one month after the Federal Reserve barred the bank from growing its balance sheet.
The Fed development is tied to issues that have plagued the bank for the past 18 months or so, mainly concerning fraudulent sales practices within its retail bank.
Massachusetts securities regulators have opened an investigation of Wells Fargo Advisors to better understand the extent of problems revealed by the bank in early March. Specifically, they aim to better grasp the extent of inappropriate referrals of brokerage clients to managed and advisory accounts, unsuitable recommendations of alternative investments, as well as unsuitable referrals and recommendations tied to 401(k) rollovers.
“Wells Fargo’s recent banking scandal, which involved opening bogus accounts for their customers, leads me to believe that where there is smoke, there’s fire,” said Commonwealth Secretary William Galvin, the state’s top securities regulator, in a statement. “I need to be assured that Massachusetts residents haven’t been burned by corporate greed.”
Wells Fargo Advisors includes about 14,500 registered representatives.
Galvin’s office adds that it is seeking both more details on the scope of Wells Fargo’s own review of issues within the wealth unit and “reasonable assurances that any Massachusetts investors affected by unsuitable recommendations will be made whole.”
“I am aware that there has been a recent trend in the industry to push investors into wealth management accounts which may bring more revenues to the firm, but which are not suitable for all investors,” Galvin said. “Given the recent retirement savings crisis in America, referrals and recommendations involving 401(k) accounts should be closely scrutinized, in light of the Department of Labor’s fiduciary rule.”
Meanwhile, industry watchers are speaking out on what the latest developments mean for the group’s 14,500 advisors. Over the past 18 months, the firm has been in the spotlight over a variety of fraudulent banking and other non-wealth problems. “Will things continue to be as relentless as they’ve been?” Sarch asked.
Wells Fargo is working with the law firm Shearman & Sterling, which handled earlier investigations, to conduct the review of the wealth unit, according to several reports. “You do not hire this [legal] team … casually,” the recruiter said.
“There’s a lot of speculation at this point,” Sarch said. “But my instincts tell me there’s always more to the story … and this could be the tip of the iceberg.”
(Like other Wall Street law firms, Shearman & Sterling has among the highest legal fees in the country. Court filings from last year show partners can charge anywhere from $925 to $1,500 an hour, while associates can charge from $325 to $995 an hour.)
“Any series of ongoing issues can impact financial advisors’ ability to prospect and retain clients, and hence the same series of issues can have an impact on recruiting and retention of financial advisors,” explained Chip Roame, head of Tiburon Strategic Advisors. Wells Fargo’s reference to “problematic fee calculations” in its annual report “sounds like someone at HQ misapplied some fee schedules, maybe schedules that should have been lower on fiduciary accounts,” he said.
While such errors may not come as shock to advisors, prospective clients might find such activities “sneaky,” the consultant says. Advisors do not want to deal with questions about such issues from clients, whether they directly affected them or not.
As for the “inappropriate referrals and recommendations affecting 401(k) plan rollovers,” it could be that some financial advisors might have made mistakes and perhaps wrongly encouraged some clients to exit these plans for higher cost products, according to Roame.
“This can still be an appropriate move, though, if the clients receive more services — like financial planning — from the financial advisors,” he explained.
Andy Tasnady of the compensation consulting group Tasnady and Associates, however, sees the latest reviews as being “on the fringes of main business.” Alternative investments, mentioned as part of the rollover review, “are a very small percent of their business,” he explained.
But because Wells Fargo has been in the news a lot recently, the firm is getting lots of attention today. “Firms want to know if there are things being uncovered [so they have] an opportunity to put in better controls,” Tasnady added.
“We all appreciate how difficult it is to take questions from clients and team members in this environment of heightened media scrutiny,” said Weiss in a memo. “Let’s remain calm, stay in front of our clients, and continue to excel at … helping them achieve their financial goals.”
With the Federal Reserve also watching it carefully, it appears the bank has the time it needs to make such changes. “We will not lightly lift” the growth restriction now on the bank, Fed Chairman Jerome Powell said during a recent Senate Banking Committee hearing, according to a Bloomberg report. Powell also said Wells Fargo could face sanctions for a “significant period.”
Merrill, Morgan Stanley News
Merrill Lynch’s private-banking group is reshuffling its leadership to enhance the experiences of its ultra-high-net-worth clients. Don Plaus, head of Private Banking & Investment Group (PBIG), International and Institutional for Merrill Lynch — which includes 380 private wealth advisors — announced the changes in mid-March. Overall, Merrill Lynch has nearly 15,000 registered reps.
The firm says it will bring experts now serving non-U.S. and PBIG clients together into one team. It also is creating a new sub-unit called Strategic Wealth Advisory Services, which will provide specialized services for PBIG, International or Institutional clients — like “wealth structuring, generational wealth and family planning, and day-to-day wealth complexity management,” according to a memo.
“With these organizational changes in place, I’m confident we’ll optimize our opportunities and help advisors leverage the resources of Bank of America and Merrill Lynch to meet the unique needs of our clients,” said Plaus, in a statement. (The Center for Family Wealth Dynamics and Governance, led by Stacy Allred, will become part of SWAS.)
Merrill Lynch’s move in the UHNW space came about two weeks after rival Morgan Stanley created a 66-person team — set to be called Morgan Stanley Family Office Resources — to help it better serve ultra-wealthy clients. This new group will include the former Advanced Resources Center and a new group of UHNW Planning Specialists. It will focus on governance and legacy issues, wealth strategies and signature access to concierge and other services.
“We have about 550 Private Wealth Advisors (PWAs) who tend to have a heavier weighting of UHNW accounts, but have 15,000-plus advisors in the broader Wealth Management segment who may cover one or many UHNW relationships,” Morgan Stanley said in a statement.
Janet Levaux is editor-in-chief of Investment Advisor and Research on Wealth. She can be reached at firstname.lastname@example.org.