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March 02, 2020 at 03:03 PM
The news that Wells Fargo agreed to pay the Securities and Exchange Commission $35 million over shortcomings in its recommendations of inverse ETFs has advisors riled up on social media.
It also returns the spotlight to troubled practices at the bank, which only recently said it would pay $3 billion to the SEC and Department of Justice to resolve potential criminal and civil charges tied to its fake-accounts scandals.
Michael Batnick, CFA, tweeted a statement from the latest SEC settlement early Monday: “Wells Fargo recommended that certain retail clients buy and hold, in many cases for months or years, single-inverse ETFs with daily reset features, including in retirement accounts.” (Batnick is head of research at Ritholtz Wealth Management, but posts on Twitter as “a long-distance reader.”)
In the SEC settlement, the regulator quoted from a January 2016 response from a Wells Fargo analyst to financial advisors’ questions about the performance of a single-inverse ETF:
“[S]olely based on it[s] 2015 performance…one may have (incorrectly) guessed that [the single-inverse ETF] was a triple-inverse geared ETF. ☹ Again, high volatility is toxic for geared ETPs, even for a non-levered inverse ETF.”
At various points, the analyst had cautioned that single-inverse ETFs “were not intended for portfolio protection against an eventual downturn in the market and were misunderstood by investors,” the SEC said, but this guidance was not given to Wells Fargo advisors recommending the products.
As a result of Wells Fargo’s failings, its clients collectively “sustained millions of dollars of losses in the product by holding the positions,” according to the SEC.
“What happens when greed and ignorance collide?” asked James Werner, a certified financial planner, in a tweet.
Overlooking Risk Issues
The SEC document added: “Some of these clients had little or no relevant investing experience and had been identified to Wells Fargo as clients with moderate or conservative risk tolerances.”
