A July 27, 2018 article by the Wall Street Journal reports that a number of Wells Fargo financial advisers have sent letters to regulatory authorities alleging “longstanding problems with the bank’s dealing with wealth-management customers,” including sales goals that incentivized advisers to direct clients to invest in higher-fee products or to move assets between products or platforms, thus generating more revenue for the firm and higher bonuses for advisers. According to the report, one of these letters led to investigations by the Department of Justice and the Securities and Exchange Commission.
The Journal report discusses documents and interviews with dozens of current and former employees that detail various issues in Wells Fargo’s wealth management unit. Reportedly, advisers periodically “shifted client assets between products such as certificates of deposit and structured notes, or put clients into products that earned the bank higher fees.” These activities involved “unclear fee arrangements” and also allowed advisers, in some cases, to make various changes to a customer’s account without any requirement that they inform the customer, even if those changes result in fees. The Journal’s sources stated that “wealthy clients in Wells Fargo’s private bank were frequent targets.”
Wells Fargo investment managers reportedly “pressured” financial advisers to direct customers with assets exceeding $2 million to the company’s “higher-fee platform,” Investment Fiduciary Services. The bank reportedly had “mandated client quotes” for certain risky alternative investments, even if these were unsuitable for the clients. In particular, according to the report, “Wealthier clients often were placed in the GAI Agility Income Fund or the GAI Corbin Multi-Strategy Fund.” Wells Fargo has a majority ownership of both funds and can “collect management fees” from them.
In one particular region—Phoenix’s East Valley—financial advisers were required to meet a goal of “$64,000 in annual product sales for private bank clients, or those with assets above $2.5 million on the Investment Fiduciary Services platform,” according to the Journal. Advisers who failed to meet these goals were “removed from top branches” in the company. The article also suggests that the company’s payment model for advisers “may have exacerbated the problems.” From 2012 until 2015, some employees were eligible for a 15% bonus if they grew revenues by 15% annually. Some advisers reportedly “used loopholes” to meet the goals, resulting in Wells Fargo paying out over $750 million in bonuses, much more than the $250 million it had put aside.
In 2015, advisers reportedly directed customers to invest in relatively high-fee annuities as a means of meeting their revenue goals. In some instances, advisers recommended annuity switches from products with large surrender charges to products with annual fees from one percent to 1.5 percent—this is known as account churning, a practice in which financial advisers perform (often unnecessary) transactions for the purpose of generating commissions.
In a statement to the Journal, a Wells Fargo spokesperson said that the company “is committed to ‘thorough reviews’ of the wealth and investment management business and is making ‘significant progress’ to identify and fix any issues.” She also said that all investment fees are “fully disclosed” and that Wells Fargo is “committed to transparency.”
Read the full report here.