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Wells Fargo Sales Push Extended to Wealth Unit, Ex-Workers Say

Some clients of the bank’s wealth-management division were steered into investments that maximized revenue for the bank and compensation for its employees.

By Neil Weinberg, Laura J. Keller and Katherine Chiglinsky

(Bloomberg) --Credit card and savings customers may not be the only ones who were misled by Wells Fargo & Co.

Some clients of the bank’s wealth-management division were steered into investments that maximized revenue for the bank and compensation for its employees, according to several people familiar with the unit and documents reviewed by Bloomberg. Those investments weren’t always in the best interests of clients, the people said. They included estates, trusts and loans, according to one of the people and the documents.

Wealth advisers as recently as 2016 were given ambitious quotas and could earn extra pay by steering clients into loans and accounts with recurring fees, said the people, who included one current and five former Wells Fargo advisers. To hit certain goals, some advisers plugged data into financial planning software that they knew would recommend portfolios their clients already owned, two of the people said.

The quotas and incentives driving the wealth unit’s strategy were similar to the inducements that led employees in the bank’s retail business to create roughly 3.5 million potentially bogus accounts, these people said. The scandal over fake accounts, disclosed in September 2016, led to the firing of 5,300 employees and the ouster of the bank’s chief executive officer.

Responding to questions, Wells Fargo acknowledged that the wealth-management unit used such incentives until 2017 but said those incentives didn’t harm clients. The bank is nonetheless reviewing its wealth and investment-management division’s activities, it added.

Any assertion that its past or present compensation plans did “anything other than incentivizing positive client outcomes is simply incorrect,” bank spokeswoman Shea Leordeanu said.

The scrutiny of Wells Fargo’s wealth-management business offers an inside look at how sales incentives are sometimes structured at big financial institutions. These inducements are usually legal and are common among banks, which typically regard them as closely held secrets.

The question for U.S. authorities is whether Wells Fargo, which has already been sanctioned by the Federal Reserve Board over the fake-account scandal, used incentives that either weren’t properly disclosed or breached its duty to clients.

The Justice Department and the Securities and Exchange Commission are investigating whether the unit inappropriately sold clients in-house investments, a person familiar with the probes said. Spokeswomen for the Justice Department and SEC declined to comment.

Internal Probe

Wells Fargo disclosed federal inquiries in a March filing without naming the agencies and said its board was reviewing its wealth-management operations at the government’s request. The bank is examining whether workers made inappropriate recommendations involving 401(k) rollovers, alternative assets, estates and trusts, it added.

The wealth-management unit is “making significant progress in our work to identify and fix any issues, make things right, and build a better, stronger company,” Leordeanu said in a written statement. She said the early 2017 changes to the pay structure eliminated rewards for promoting certain account types in favor of paying for overall revenue growth.

Wells Fargo Advisors, the main retail arm of the wealth-management unit, stands by its pay plans and reviews them regularly to ensure they’re working in the best interests of clients, Leordeanu said.

Wells Fargo Advisors manages $1.6 trillion in client assets and employs 14,500 advisers who work at about 5,360 of its 6,000 retail branches, as well as in stand-alone investment offices for wealthy clients.

The new details about Wells Fargo’s wealth-management business in recent years by the current and former employees could add to the bank’s woes. Wells Fargo shares have lost about 13 percent of their value this year as an S&P financials index has declined by 1 percent.

The bank is also continuing to field questions from local, state and federal authorities, in a domino-line of probes set off by its 2016 retail banking settlement. In February, the Federal Reserve took the rare step of sanctioning Wells Fargo, saying it can’t expand until it fixes oversight lapses.

Bank Firings

Internal documents show that, in the past, some employees in retail bank branches could earn thousands of dollars for referring a client to a bank unit that handles trusts and estates, according to a person who has reviewed the documents.

Certain other retail employees were paid flat $25 fees for referring a client to investment advisers, the person added. A 2014 study by Gallup Inc., the polling company, said that employee sales incentives were common in bank branches.

For referrals to the trusts and estates unit, some retail bank employees received as much as 15 percent of first-year revenue on accounts of up to $10 million, Leordeanu acknowledged when asked about the incentives. The investments were often placed in a fee-based product known as a managed account. A bank investment strategist or trust adviser, rather than the client, picks specific investments in those accounts. Some customers prefer these managed accounts because they prefer to pay a fee instead of trading commissions.

A 2015 investment unit pay grid reviewed by Bloomberg indicates that advisers received credits for having at least 60 percent of client assets in fee-based accounts or for generating at least 80 percent of revenue from those accounts, rather than from commission-based brokerage accounts.

Planning Software

The push to sell was also aided by technology. When customers sat down at Wells Fargo Advisors, the reps across the desk were instructed by their managers to run them through the bank’s Envision financial planning software. The software relies on the same sort of Monte Carlo financial planning simulations used at other banks to estimate clients’ chances of hitting financial goals, according to the internal pay grid as well as one current and one former adviser.

Some advisers would run the Envision simulations without their clients present by plugging in numbers they knew would recommend investments that clients already held, one former adviser said. At least one manager actively encouraged that behavior, another person said, on the belief that owning more Wells Fargo products would make client assets “sticky” and unlikely to leave the bank.

The bank says its use of the Envision software didn’t disadvantage clients. “If anyone were to create consistently low-quality plans, we take action,” Leordeanu said.

Industry Practices

Many of the practices described by current and former Wells Fargo employees are similar to those that have drawn regulatory scrutiny at other banks.

In-house investments and managed accounts were at the core of JPMorgan Chase & Co.’s agreement three years ago to pay a $367 million asset-management settlement to the SEC and the Commodity Futures Trading Commission over allegations that it failed to properly inform clients that it was selecting investments based on their profitability to the bank. Some of those investments involved hedge funds, a type of alternative asset, which paid the bank to recommend them to asset management clients.

JPMorgan acknowledged failing to inform customers of the conflicts and agreed to changes. JPMorgan’s lapses were brought to light with the help of whistle-blowers who provided details of its internal practices to regulators.

--With assistance from Matt Robinson.To contact the reporters on this story: Neil Weinberg in New York at [email protected] ;Laura J. Keller in New York at [email protected] ;Katherine Chiglinsky in New York at [email protected] To contact the editors responsible for this story: Jeffrey D Grocott at [email protected] David S. Joachim

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