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Client assets in the wealth group remain steady at $1.9 trillion. But the number of financial advisors as of June 30 is The Scandals’ Causes According 14,226 — down 860, or about 6%, from September 2016. That’s to CEO Tim Sloan when the fake-accounts scandal at its parent company resulted in a $185 million fine from the Consumer Financial Protection We had product sales goals that Bureau; an estimate of the number of unauthorized deposit sometimes resulted in behaviors and credit-card accounts opened since 2009 stood at as many and practices that did not serve as 3.5 million (as of August 2017). our customers’ or our team Will the bank’s latest rebranding and other corporate efforts members’ interests. And we were make a difference to its wealth business, and can slow to see the harm they caused. stop the outflow of registered representatives? And what do the fake-accounts and other scandals at Wells Fargo mean for Second, despite our ongoing efforts to combat the broader wealth industry? Investment Advisor spoke with a these unacceptable bad practices and bad group of industry experts about these issues to gauge both the behaviors, they persisted, because we either When Will significance of the bank’s troubles and their resolution. minimized the problem, or we failed to see the problem for what it really was — something bigger By Janet Levaux Reputational Risks than we originally imagined. Wells Fargo, now subject to a Federal Reserve consent order Photo-illustration by that restricts its growth, was raked over the coals by Congress Third, we failed to acknowledge the role leadership Chris Nicholls in September 2016. “The damage you have done to the market, played, and, as a result, many felt we blamed our to your industry, far exceeds the damage to your own busi- team members. That one still hurts, and I am It End? ness,” Rep. Mick Mulvaney (R-S.C.) told then Chairman and committed to rectifying it. As the bad news and CEO John Stumpf on Sept. 29. “Y’all were rotten.” Earlier, Sen. Elizabeth Warren (D-Mass.) said to the execu- Fourth, there were warnings signs in hindsight that advisor departures tive: “You should resign, … and you should be criminally we should have heeded sooner. continue, experts debate investigated.” Stumpf gave his resignation to the bank in mid- And finally, our leaders should have invited October 2016, and Tim Sloan took over as CEO. inspection more often and welcomed credible Wells Fargo’s future At the time, Sloan told employees: “Simply showing we care challenges to how we operate. and we’re committed to regaining the public’s trust is invalu- and what the wealth able. It’s also important to note there are no quick fixes to our Source: Speech of Oct. 25, 2016 challenges. You also should expect more tough headlines, as industry can learn additional accountability actions occur, and other investiga- from its scandals. tions and reviews are completed. Some of that is going to be This fallout has been predicted by recruiter Danny Sarch very painful for us.” of Leitner Sarch Consultants and others for nearly two years. He also pledged that the bank would “learn from [its] “Every competitor wins in this situation to a certain extent. mistakes,” adding that Wells Fargo’s legacy and future are [Wells Fargo] will lose people. If it drags on for months “worth fighting for.” with more investigations by authorities, that makes it worse. Issues continued to pile up (see “Timeline for Wells Fargo’s Advisors will get tired of answering questions” from clients Scandals”). Meanwhile, the bank launched its “Building Better and prospects, he said in October 2016, adding that such Every Day” campaign in 2017 and staged the “Re-Established” fatigue with a “tainted brand” leads advisors to do some seri- rebranding effort this year. “While we have made solid prog- ous thinking about leaving and perhaps to take action. ress, we recognize there is still work to be done,” Sloan said in Since then, of course, attention has turned to other prob- a statement about the PR effort on May 7, 2018. lems at the bank and, in 2018, even within the wealth unit. uly 13, 2018, was a bad day for Wells “incorrect fees being applied to certain assets At an industry event later that month, Shrewsberry acknowl- Earlier this year, Wells Fargo said it was reviewing some Fargo. Its second-quarter earnings and and accounts … during the past seven years,” edged that the “whole ‘mission accomplished’ thing has failed overcharges and incorrect wealth management fees, as well revenues missed analysts’ expectations, according to CFO John Shrewsberry. During for other people before … so I don’t think you’re going to hear as possibly “inappropriate” referrals and recommendations loans and deposits dropped over the past a call with equity analysts, he explained that those words [from us].” affecting 401(k) rollovers to its wealth unit. Regulators soon year,J and its stock price fell 1.2%. Meanwhile, the third-party review of its client accounts After Wells Fargo disclosed its second-quarter earnings, the became involved. net income at the Wealth and Investment continues “to determine the extent of any CFO acknowledged that its advisors could “make the case that Next came news that some segments of Wealth Brokerage Management unit sank 37%. additional necessary remediation, including with it’s a little harder to compete for new business or to compete Services and the Private Client Group could possibly be The bank revealed that it has set aside $114 respect to additional accounts not yet reviewed.” head-to-head with other advisors for new business,” according merged, according to a report in The Wall Street Journal. The million for refunds to wealth clients tied to In other words, stay tuned. to a Reuters report. “Just as it was a big tailwind because of bank’s “Wealth and Investment Management group is reimag- Wells Fargo’s reputation before that.” ining our business to become more efficient,” a spokesperson Tim Sloan photo: David Paul Morris/Bloomberg Paul David photo: Tim Sloan

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said in a statement, but “no final deci- Woes at Wells Fargo Wealth & Investment Management Fargo to leave. “So, I don’t think they Heather Hunt-Ruddy, who heads sions have been made.” The number of financial advisors is down by 860 since news of fake-accounts and are through the worst by any stretch,” Wells Fargo Advisors’ Client Experience and Growth for Wells These developments seem to have other troubles came to regulators' attention. Meanwhile, net income for the business said Sarch. Recent M&A Roots Fargo Advisors, said in a statement: negatively affected Wells Fargo’s advi- unit has fluctuated, taking its biggest drop in the most-recent quarter. “When we think about how we retain sors and its wealth-management busi- Wells Fargo’s Take our advisors, it’s about culture and how merges with ness, but to what degree? “There’s 16K $710 $714 $800 For its part, the bank insists its advisor- 2001 we enable our FAs to succeed … Our cul- $677 $682 $659 , combining no question that other reps at other $653 $623 $700 headcount issues are tied to the indus- ture is the result of our history of merg- Wheat First Union and Interstate firms have used it against them. They $600 trywide problem of aging. Over the past ing smaller firms, and we’ve worked Johnson Lane do not know the opportunities that 15,086 $445 $500 12 months, its FA force dropped by “301 hard to keep that connected feeling even they have lost …” in terms of clients, 15K 14,882 $400 or 2.1%, with 259 producing FAs retiring as we’ve grown.” 14,657 $300 Wachovia combines Overall, the bank appears upbeat on prospects and assets, Sarch explained 14,527 14,564 14,544 during that time, which is nearly 80% 2003 in mid-July. “An advisor never hears 14,397 $200 of the net reduction in FA headcount,” with Prudential Financial WFA’s headcount, despite the quarterly 14,226 about these lost opportunities, and $100 according to a statement. pattern of declines. “Our retention pro- Wachovia acquires A.G. that’s why [hits to a firm’s] reputation 14K $0 In the second quarter of 2018, it notes, 2007 grams are working. We’re hiring top- are so damaging.” Q3 ’16 Q4 ’16 Q1 ’17 Q2 ’17 Q3 ’17 Q4 ’17 Q1 ’18 Q2 ’18 its headcount fell 173 or 1.2% from the Edwards notch advisors. We’re proud of the great work being done,” it stated. For Chip Roame, head of the consult- Advisor Headcount Net Income (millions) prior quarter, with 56 producing FAs ing group Tiburon Strategic Advisors, retiring. “On a percentage basis, we are Wells Fargo buys 2008 however, Wells Fargo’s wealth-manage- Source: Company reports basically flat from last quarter. While Q2 for ‘Picking at the Scab’ ment business appears to be “one of saw some challenges, we feel confident $15 billion, rolls out Wells Fargo Others disagree with this sanguine the least-accused businesses.” Though in our approach going forward,” Wells Advisors brand view of the wealth unit and the bank’s improper 401(k) referrals and other issues have come to light, Most of the departing advisors have not gone to other wire- Fargo explained. overall situation given the lengthy generally speaking “its wealth-management business alone house firms. Instead, they have left to join Raymond James, According to Sloan, “I wouldn’t nec- nature of its regulatory scrutiny and seems no more troubled than its peers.” Stifel Financial, Baird, Commonwealth Financial, Kestra essarily describe it as a concern on our part … [W]hat you’re time in the headlines. Financial and other broker-dealers. In April, for example, a seeing is an aging and retirement of the FA population. I think “For Wells Fargo, the challenge seems to be that outsiders Down, Down, Down team of three FAs with over $900 million in assets moved to it’s somewhere between one-third or 40% of the population — are continually picking at the scab. Every couple of months Since Wells Fargo’s fake-accounts scandal first made head- RBC Wealth Management in Hartford. or the attrition is just folks retiring, which we’ve been planning you hear some new things, ….” said Andy Tasnady, head of the lines nationwide in the fall of 2016, its advisor headcount “Wells Fargo has always had the problem of being bureau- for, for a while.” compensation consulting firm Tasnady & Associates. “The has steadily declined — going from 15,086 as of Sept. 30, cratic, like the other wirehouses. And with a tainted reputa- The executive discussed advisor retention issue at length government keeps on digging into more and more situations … 2016, to 14,226 as June 30, 2018. News of departing reps tion, it’s become a place where people are asking, ‘Why would in a call with equity analysts on July 13. He explained that and uncovering more things.” have been steady. I want to stay?’ And that has continued,” Sarch said. Wachovia’s purchase of A.G. Edwards involved a 10-year While Tasnady and other experts point out that some of Some of the more interesting announcements involve “In fact, I do not see that going away,” he added, point- agreement structure, which “matured in the second quar- Wells Fargo’s issues also may exist at rival wealth units and Wells Fargo advisors leaving to join Benjamin F. Edwards, a ing to the likelihood of more policies and procedures in the ter [of 2018]. And so, we saw a little bit of an increase [in banks, “It seems like they are getting so much attention from St. Louis-based firm started by the great great grandson of wake of the regulatory review of fees and other issues in the departures] there.” government agencies,” he said. broker-dealer A.G. Edwards’ founder Albert Gallatin Edwards wealth-management unit. “They likely are tightening all that Overall, Sloan said, “when you look at the first quarter to the As Janet Yellen explained, before stepping down as chair- in 2008. A.G. Edwards was bought by Wachovia in 2007 and up, because they are rightfully paranoid about any looseness second quarter, I think we’re down less than 200 FAs, and the person of the Federal Reserve in February: “We cannot toler- then merged with Wells Fargo on Dec. 31, 2008; in July 2009, they may have had before.” overall quality of the FAs has actually increased a bit.” ate pervasive and persistent misconduct at any bank, and the Wachovia Securities was renamed Wells Fargo Advisors and For some advisors, these new rules “could be another shoe He also mentioned that as aging reps depart, Wells Fargo consumers harmed by Wells Fargo expect that robust and Wells Fargo Investments. (See “Wells Fargo Advisors’ Recent to drop,” as might anticipated details regarding the planned is “continuing to develop the new FAs in the salary and bonus comprehensive reforms will be put in place to make certain M&A Roots.”) Of the eight advisors Ben Edwards recently restructuring of the wealth unit, according to the recruiter. kind of business model structure and then making sure that that the abuses do not occur again.” recruited with about $616 million in combined client assets, Questions about how the traditional, bank-based and inde- we’re continuing to invest on the digital side … so that the new In general, Tasnady says, businesses that want to improve for instance, five joined from Wells Fargo. pendent advisors could be integrated, for instance, might be demographic of investors has got additional options in addi- their brands and get back to focusing on business “have to stop one more factor that could prompt some advisors with Wells tion to a real high-quality traditional FA model.” being in the press.” They also need to “clean house, get all the Timeline for Wells Fargo’s Scandals Sept. 2016 Oct. 2016 Nov. 2016 Jan. 2017 Feb. 2017 Mar. 2017 Apr. 2017

Regulators say employees created several million of unauthorized bank and California starts probe SEC probe Wells Fargo says Four senior Federal agency accuses Wells Fargo of Class action suit settlement rises to credit card accounts without client knowledge (as news reports dating back to into possible identity tied to as there are signs bank “egregious,” “discriminatory and illegal” $142 million; clawback of pay from 2011 in The Wall Street Journal and 2013 in the Los Angeles Times had suggested); fraud; Stumpf steps many as it retaliated employees practices; federal banking regulator some former executives begins; bank hit with $185 million fine and says it is firing 5,300 employees; Department down with Tim Sloan 2 million against workers are fired. downgrades Wells Fargo’s community report from independent directors of Justice launches probe; Chairman and CEO John Stumpf forfeits pay; bank taking over as CEO fake who tried lending rating; bank settles class action shows the bank prepared an internal accused of illegally repossessing over 400 cars without court order and agrees and Stephen Sanger accounts to blow the suit with preliminary deal of $110 million report in 2004 about practices that to pay $24 million to settle charges; it promises to end aggressive sales goals; serving as non- disclosed. whistle on fake for wronged clients. may have encouraged employees to Stumpf appears before Congress. executive chairman. accounts. create fake accounts.

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dirt out and own up to it; a [tainted] brand can survive, but it to leave the Protocol for Broker-Dealer Recruiting protocol to in wealth management, he said, based from whatever firm has issues. That’s takes much longer to recover when there’s a drip, drip, drip of slow down the cycle, “Until it’s truly seen a culture change, it on conversations he has had with Notes from a Scandal probably what has been happening bad news,” he explained. remains tough place to work,” he explained. “For business and some advisors. with Wells Fargo — the more you lose, “My guess is that they have tried internally to review all they for the country, it would be good if the scandals slowed down.” Its reputation “definitely took a hit, For further details on the more [advisors] think maybe they can. Hopefully, if they do discover more, they can get ahead of there was a slowdown, lots of clients Wells Fargo’s fake- should go too.” any potential fallout, which is commonly understood as Crisis Lessons to Learn were asking questions,” the consultant accounts saga, see But, as other industry experts have the board’s 110-page Management 101,” said Tasnady. As for what the Wells Fargo saga represents for the broader says. “But Wells Fargo has been power- pointed out, strong brands tend to take report: assets.documentcloud.org/ Wells Fargo said in 2016 that it had fired some 5,300 wealth industry, the recruiter points to risks associated with fully communicating, rebranding itself documents/3549340/Report-on- a hit “and as long as that is tempo- employees connected with the bad accounts. At the execu- cross-selling products based in other parts of the bank or par- and re-establishing itself.” Wells-Fargo-s-Sales-Scandal.pdf rary, they come out OK,” said Tasnady. tive level, Stumpf and Carrie Tolstedt — the company’s ent company: “The big takeway is that the big firms do not rec- The impetus for advisors to breakaway, Furthermore, the Wells Fargo situation head of Community Banking — left that same year; about ognize advisors’ fears when they refer clients to other places though, has not resulted in a dramatically and its implications are more instructive $180 million of their compensation and that of several other in the bank, where client experience and service are out of the lower headcount at Wells Fargo, Merrill or other brands that for firms owned by banks than for the wealth industry overall. senior executives was clawed back. advisors’ hands.” have hit bumps. “The majority of [advisors] do not leave. They Specifically, there are benefits to being part of a much larger The bank’s board released a 110-page investigation of Wells This risk has little upside but lots of downside, Sarch adds, do not go, though there may be a spike [in departures].” institution with a large mix of products and services, “with the Fargo’s sales practices in April 2017. This report summarized given potential problems with a commercial loan, mortgage For Wells Fargo, the bull market “really helped,” Welsh downside being that you can be exposed to and dragged into of what went wrong and some steps taken to correct problems. or credit card. “Cross-selling should not be considered evil, points out. “There were headline problems, but clients did not the problems of the bank,” he explains. Having a brand that In 2018, regulators demanded that Wells Fargo replace four … but the fear is that when clients are subject to a frustrating lose money. There could have been a much worse outcome.” differs from that of the parent company — Bank of America vs. board members. They also reportedly worked with the bank experience, this will damage the relationship between clients Across industries, clients and employees “tend to forget,” Merrill Lynch — is beneficial, the consultant adds. to ensure the retirements of the head of financial crimes risk and advisors,” he explained. he says, adding that he sees Wells Fargo not as a sinking Smaller firms and non-bank-owned firms can attract management Jim Richards, head of operational risk and com- As issues linger, as they have at Wells Fargo, they “chip away ship but as a firm that has survived its time in the eye of regulators’ attention due to problems like excessive trading, pliance Kevin Oden, enterprise risk head Keb Byers and com- at trust,” Sarch says. As a scandal-hit company makes a series the storm. inappropriate product sales, rogue advisors, and lower lev- munity banking risk group head Vic Albrecht. of changes — to leadership, corporate culture, organizational How long will it take for brand overall to bounce back? “Time els of supervision and controls, Tasnady states. Also, com- Regarding what steps Wells Fargo Advisors should take, it charts, etc., — advisors and staff look for consistency. heals all wounds,” Roame said. “Think of firms that went through pared with larger rivals, these firms have less to spend on could “get creative with some type of an incentive program, “It matters. Firms need to reinvent themselves when things their own troubled periods; many are thought of highly today.” the compliance resources needed to ensure that corporate which recognizes that advisors have been dealing with some go wrong, but every time they do so it’s like [they’re] starting reputations are protected. short-term brand issues,” Tasnady points out. “Most likely, the over,” the recruiter explained. In general, this scenario has More Lessons For advisors overall, this means it is best to “stick with retention situation won’t get more dire, and they can avoid the been experienced by wirehouse reps, which has given other Many firms run into rough patches and find themselves in the a company that has [proper] policies and risk controls, can industry drama of ’08-’09 when some firms moved to add long- broker-dealers a chance to shine and capture more advisors. press due to their own activities or those of parent companies, stay out of news” and is very well run, he says. term retention incentives.” Brands can bounce back, points out Tim Welsh, head of the according to Tasnady. At first, it looks horrible and then six to This sounds like the perfect formula. Yet the financial- Also, recruiting bonuses “would help,” according to Roame. financial-services consultancy Nexus Strategy. After a series of nine months later everyone seems to forget about the rough advice sector likely will continue to hit bumps — at least Because switching firms often takes about six months for problems, Merrill Lynch was sold to Bank of America in 2008 at patch, he says. Past examples include issues at Citigroup Smith occasionally — as it pursues business growth in a complex due diligence, some recruiters remain skeptical about Wells a deep discount from its 2007 level. “You would think that if any Barney, PaineWebber (now part of UBS) and Merrill Lynch. and highly regulated field, and that promises to keep the Fargo’s ability to turn around its declining headcount, at least advisors or clients were going to leave, this would have been it. For advisors, there’s the tipping point issue, the compen- press diligent. in the short term. “We have yet to see the end of significant But no … the brand survived, though it got dented [for] a bit.” sation consultant points out: “Once and a while, you get a attrition at Wells Fargo,” Sarch said. Welsh sees similarities with Wells Fargo and its fake- situation where things get worse and worse, with recruiters Janet Levaux, MA/MBA, is editor-in-chief of Investment Advisor; While the firm could decide (like Morgan Stanley and UBS) accounts scandal. “There is pickup … and business is back” focusing on the weakest link trying to get advisors to jump reach her at [email protected].

Jun. 2017 Jul. 2017 Aug. 2017 Oct. 2017 Nov. 2017 Jan. 2018 Feb. 2018 Mar. 2018 Apr. 2018 May 2018 Jun. 2018 Jul. 2018

Wells Fargo The bank says Wells Fargo says The bank admits it Wells Bank Federal Wells Fargo says The bank agrees Wells Fargo News Wealth unit is accused it charged at it has found wrongly fined some Fargo says sets aside Reserve regulators asked it in to $1 billion reaches breaks that to refund of modifying least 570,000 as many as 1.4 110,000 mortgage clients; it illegally a $3.25 says the late-2017 to review the penalty tied to $480 million the bank clients $114 mortgages clients for million more regulators say Wells Fargo repossessed billion bank cannot Wealth and Investment mortgage and class-action may merge million due without car insurance fake accounts, sold investments it didn’t another reserve grow assets Management unit for auto-loan issues; settlement some to incorrect authorization they did not bringing the total understand; regulators ask 450 service to cover until it has “inappropriate referrals or details emerge over fake segments charges from clients. need and that number up to 3.5 bank to pay $3.4 million members’ litigation improved its recommendations” involving on regulators’ accounts. of the for certain some 20,000 million; bank is to brokerage clients cars, agrees tied to governance 401(k) plan rollovers examination of wealth unit. assets and may have sued for allegedly who were sold volatility- to pay an mortgage and and some alternative clients being accounts. defaulted overcharging linked exchange traded extra $5.4 issues, controls; the investments and brokerage pushed to obtain on car loans small businesses products (from July 2010 million and fake bank agrees clients being referred to in-house funds for related for credit card to May 2012) without fully promises accounts to overhaul the bank’s investment and for retirement reasons. transactions via understanding the risks refunds. and other its board. fiduciary services business. accounts. Sources: CNN, Reuters, The Wall Street Journal, 63-page contract. and features. matters. ThinkAdvisor.com and Wikipedia

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