A clearer picture is emerging about how aggressive sales goals may have caused problems for clients in Wells Fargo’s wealth management unit, according to a lengthy report Friday in The Wall Street Journal.
(Check out Investment Advisor magazine’s latest cover story, When Will Wells Fargo’s Scandals End?)
Financial advisors encouraged investors to move funds into products in order to generate extra fees, more revenue and larger bonuses, the paper said, after speaking with some 25 former employees and reviews bank documents. Wells Fargo Private Bank clients, for instance, were urged to put their money into alternative-investment funds owned by the bank.
“We are committed to thorough reviews of Wealth and Investment Management …,” the bank said in a statement shared with ThinkAdvisor. “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.”
This investigation of issues was first disclosed by Wells Fargo in a regulatory filing on March 1. This was about six months after four Wells Fargo financial advisors in Arizona reached out to regulators about issues within the unit and two months after two FAs in California sent a formal complaint to the Securities and Exchange Commission in which they alleged similar problems.
“The investigations show the difficulties Wells Fargo is facing as it tries to put its sales-practices problems behind it,” the Journal explained. The concerns cited with the bank’s wealth-management division also highlight how pervasive issues at Wells Fargo have become.”
Some clients in the wealth unit had their assets moved between certificates of deposit and structured notes or invested in ways that would allow Wells Fargo to earn higher fees, former and current employees told the paper.
Such activities involved “unclear fee arrangements,” according sources who spoke with the Journal. After getting the client’s initial sign-off, advisors often would “make multiple changes to accounts without having to update the customer” and that led to more fees.
Wells Fargo disagrees with this characterization. Across the Wealth and Investment Management unit, the bank said: “While different types of accounts have different fees, all fees are fully disclosed. We are committed to transparency as we work with our clients to help them realize their financial goals.”
The paper’s report highlights how the private bank came in for special attention: Clients with $2 million or more in assets were pushed onto the higher-fee Investment Fiduciary Services platform.
In addition, there were quotas tied to alternative investments involving hedge funds and private equity, for instance, the paper says, citing employees and internal bank documents; investments in products like the GAI Agility Income Fund and GAI Corbin Multi-Strategy Fund, majority owned by Wells Fargo, meant the bank was able to pick up management fees. The bank, though, says that all clients did pay such fees and that some fees are being refunded.
The Scene in Phoenix
In one area of Phoenix, the East Valley, advisors had yearly sales goals of $64,000 for private-bank clients with more than $2.5 million on the Investment Fiduciary Services platform, the paper says. Those who missed the target could not stay in “top branches.”
One former regional manager, Mahes Prasad, left the bank earlier this year, and his Financial Industry Regulatory Authority records state that he was under review for alleged “inappropriate referrals or recommendations or whether he failed to supervise any inappropriate referrals or recommendations.”
Prasad told the Journal that he quit for “personal reasons” and did not push advisors to “sell, refer or recommend inappropriate solutions to clients or move advisors to other branches if they didn’t achieve sales goals,” according to the paper.
From 2012 and 2015, some Wells Fargo advisors were able to earn bonuses of 15% or more if they increased revenues by 15% each year, and the bank put aside some $250 million for these Growth Awards, the Journal says. However, some advisors “used loopholes to reach the lofty — and in some cases unattainable — goals, [and] Wells Fargo had to pay out more than $750 million between 2012 and 2015.”
The year 2015 was known as “the year of the annuity,” for instance, and some advisors moved clients out of annuities with sizable surrender charges into other products that had yearly fees of 1% to 1.5%, employees told the paper.
There also appear to be problems tied to Envision plans, which focused on clients’ life goals and helped some advisors earn higher payouts via deferred compensation, according to the report. Wells Fargo employees added incorrect or made-up details to inflate their numbers.
“At Wells Fargo Wealth and Investment Management, we are committed to taking care of our clients’ financial needs every day and take seriously our responsibility to help them preserve and invest their hard-earned savings,” the bank said in a statement. “Our primary goal is to be a trusted advisor to our clients and to act in their best interest. We have supervisory processes and controls in place; if a team member were to act in a manner not in line with our values and our policies, we would take appropriate action.”
At least one advisor disagrees. Commenting on the Journal’s website, Zeb Long explained: “When I was an advisor with AG Edwards, they always said, ‘Your clients are yours, do what you think is best for them.’ When Wachovia/Wells Fargo bought A. G. Edwards [in 2008], they basically said, ‘Your clients are really our clients. Put them onto our platforms.’ “