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Will Wells Fargo’s Sale of Its Asset Unit Boost Its Image?

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What You Need to Know

  • “Considering the scrutiny the firm has been under, this is overdue,” says recruiter Danny Sarch.
  • There's much to debate about the impact of the WFAM sale on the bank, its advisors and its reputation.

Wells Fargo’s recent move to sell off its Asset Management unit for $2.1 billion makes strategic sense for the firm, according to industry analysts and recruiters.

“This is part of Wells Fargo’s overall strategy to boost profitability by focusing on core businesses and by cutting costs,” said executive recruiter Mark Elzweig. The deal follows Wells Fargo’s transaction with Principal Financial Group in 2019 “in which it offloaded” its institutional retirement and trust business, he noted.

The sale of Wells Fargo Asset Management to private equity firms GTCR and Reverence Capital Partners, along with news last week that the Federal Reserve approved the bank’s risk management plan, “move Wells farther down the road to achieving its goals and are morale boosters for the firm,” Elzweig told ThinkAdvisor Tuesday in an interview.

Nonetheless, there’s still plenty of debate about how much of a positive impact the sale of WFAM and related efforts will help the bank, its advisors and its overall reputation.

An ‘Overdue’ Move

The transaction does make sense beyond how it may benefit corporate strategy and morale, according to Danny Sarch, president of the recruiting firm Leitner Sarch Consultants.

First off, “manufacturing your own products and then selling them has been out of favor for years in the wealth management area, because of the perception that it creates a conflict of interest,” he said. “Considering the scrutiny the firm has been under, this is overdue.”

Others, like Tasnady Associates Managing Partner Andy Tasnady, agree: “A lot of the brokerage firms that used to pitch their own proprietary product years ago, with their own special funds,” don’t do that anymore, he explained.

Portfolio platforms now tend to be “open and you’re selling access to the world’s best investment ideas, not just your own company’s,” Tasnady said in an interview, adding that some Wells Fargo rivals moved earlier to sell off their asset management divisions.

Another issue is that “the asset management business itself has become fairly difficult,” with a lot of the money moving to exchange-traded funds where there is “tremendous fee compression,” he pointed out.

Limited Impact on Advisors

Registered reps with Wells Fargo Advisors are not expected to be affected much by the bank’s shedding of WFAM.

“My guess is that any advisors who were using these products will have access” to those products even after the sale, “so the practical effect on the individual advisor is negligible,” according to Sarch.

The transaction is expected to close in the second half of 2021, when the new company will be rebranded. As part of the deal, Wells Fargo will own a 9.9% equity interest and will continue to serve as a client and distribution partner.

Shedding WFAM may even help advisors in at least one sense, according to Tasnady. “It actually helps their credibility when they’re not seeming to pitch their own proprietary funds,” he said.

Clients tend to be “more sophisticated nowadays, with access to all sorts of broader amounts of information so … they would probably eye any Wells Fargo type of fund with a little bit of suspicion” and wonder if it’s “being pushed on [them] or [if it's] really the best option,” Tasnady explained. “They’re better off strategically without it. There’s less potential conflicts.”

The Price Tag

However, Eric Compton, Morningstar senior equity analyst, said the $2.3 billion valuation of the unit (which is different from the sales price and factors in the 9.9% equity interest Wells Fargo is keeping) was “not great and shows” WFAM “was not the strongest of franchises in the minds of potential buyers.”

Compton and Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods, both also noted that the $2.3 billion valuation and $2.1 billion sale price were lower than had been previously speculated.

WFAM primarily deals with “money market funds, so the lower price tag wasn’t too surprising, but our initial estimates did have something closer to $3 billion as being possible,” Compton said in a research note.

However, “given that WFAM makes up a relatively small proportion of Wells’ overall revenue (somewhere around 2% or less potentially), a shortfall of less than $1 billion on the sale of WFAM isn’t all that material for a bank that we think is worth closer to $186 billion overall,” he said.

Compton also liked the “strategic path that the bank is choosing to take following the sale of WFAM, thinking it makes sense to streamline and refocus operations on Wells’ core strengths and best franchises (feeling that the shedding of WFAM is certainly a step in that direction),” he said.

“We do not plan to adjust our fair value estimate of $45 per share for the bank based on these events,” he added

WFAM ended 2020 with $603 billion of assets under management,  Kleinhanzl said in his recent research note. Net asset flows have “consistently been negative, and long-term organic growth has averaged -4% over the past” five years, he explained.

The Right Move at the Right Time?

Although selling off WFAM as part of the bank’s strategy of focusing on its core businesses seems to makes sense to many of the analysts and recruiters who spoke recently with ThinkAdvisor, it remains to be seen what impact the sale will have overall on Wells Fargo’s future.

“New leadership means changes. Time will tell whether it works or not,” Sarch said. “It’s too soon to judge.”

Barry Sommers, CEO of Wells Fargo’s Wealth & Investment Management division since June 2020, is a “charismatic, sharp guy,” according to Sarch.

“That said, the brand has been tainted, and the hill to climb is pretty steep to regain the trust of advisors and their clients,” he added.

Latest Results

The number of both Wells Fargo financial and wealth advisors in the fourth quarter stood at 13,513 — vs. 14,414 a year earlier and 13,793 in the prior quarter. These advisors had average yearly fees and commissions of $1.013 million vs. $1.002 million a year ago and $943,000 in the prior quarter.

In its third-quarter financial report, Wells Fargo reported that it had 12,908 financial advisors, down 815, or 6%, from a year ago and 391, or 3%, from the prior quarter.

Wells Fargo Advisors’ financial advisor headcount on Oct. 31 was down by 2,178 advisors, or 14%, from Sept. 30, 2016, when news of its fake-accounts scandal broke widely.

Total assets for the unit were $2 trillion as of Dec. 31, 2020, up 6% from last year. Excluding Asset Management operations, assets were $1.4 trillion.

(Photo: Bloomberg)


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