Advisors Force Wells Fargo Into FINRA Arbitration Over Loss of Business

Over the last two years, Wells has lost about 1,000 advisors because of both the scandals and planned retirement. Most of the working FAs have opened their own registered investment advisors, joined existing RIAs or become independent reps.

Certainly company scandals are the stuff of Wall Street history. But the magnitude of Wells’ troubles makes the firm an outlier. Further, the bank’s fraudulent sales practices have been headline fodder for more than two years now.

“Wells Fargo is the latest hamster in the wheel. Five years ago, for example, we would have been talking about UBS and how terrible their reputation was,” says Christopher Vernon, partner in the financial dispute and FINRA arbitration firm of Vernon Litigation Group in Naples, Florida.

Reputational challenges are assuredly commonplace in the financial services industry. But in arbitrations against their firms, advisors, most of the time, do not come out on top.

“I’ve never seen any advisor get damages from a firm due to a reputational issue,” says Mark Elzweig, the president of a New York City-based executive search consultancy that bears his name that specializes in recruiting financial advisors.

Elzweig says a case like Perry and Johnson’s “isn’t likely to be successful because when you sign with a firm, you’re accepting that reputational issues come with the territory. These advisors would have to show that everyone else [FAs] at the firm lost business too — and at a comparable level.”

Perhaps more than anything, the complaints brought by Wells advisors may shine a constructive light on the industry’s controversial upfront bonus promissory-note system, which virtually handcuffs advisors to certain firms that they join. If they leave before the “loan” is completely repaid, the firm demands payment in full. If the matter winds up in FINRA arbitration, most advisors do not prevail.

In the case of Wells Fargo, many FAs with promissory notes still partially unpaid are continuing to work at a firm they no longer trust or respect. Further, the perception of Wells’ corrupt culture has made many clients head for the exits and has impeded FAs’ acquisition of new clients.

“The advisors are in a very difficult position: stuck at a firm with a large note hanging over their head,” Miller observes.

Still, there are Wells FAs whom the scandals seem to have barely touched negatively and whose business has even increased during this difficult time.

“I know people who have joined Wells Fargo within the early weeks after the scandal first broke, and they successfully transferred all their accounts. They’re doing very well now,” Elzweig says. “Advisors who have close relationships with their clients are always able to navigate through a black cloud their firm may be under.”

Net-net: If the first few advisors who have brought actions claiming they’ve been severely hurt should win their arbitrations, other Wells FAs would likely rush to sue as well.

“It will have a multiple-ripple effect,” says Scott Silver, whose Coral Springs, Florida-based Silver Law Group has expertise in FINRA arbitration and securities fraud. “Other angry, frustrated brokers absolutely will be emboldened to bring the same type of claims.”

— Related on ThinkAdvisor:

• Wells Fargo Plans to Cut Staffing Up to 10% Over 3 Years
• When Will Wells Fargo’s Scandals End?
• Lawyer Tells What Really Goes On in FINRA Arbitration