Wells Fargo under investigation by DOJ and SEC
With Wells Fargo’s credit card and savings divisions already disciplined by the Federal Reserve over a fake account scandal during which the bank opened bogus accounts on behalf of its customers, federal officials have begun an investigation into Wells Fargo Wealth Management to determine whether Wells Fargo’s investment wing inappropriately sold clients in-house investments using tactics similar to the illicit conduct that permeated the aforementioned credit card and savings scandal.
In its investigation of Wells Fargo Wealth Management, the Department of Justice and SEC seek to determine whether the firm breached its duty to investors and used incentives that were inadequately disclosed in order to sell in-house products that were more profitable for the firm, at the expense of its clients’ interests.
According to an InvestmentNews report, as recently as in 2016, Wells Fargo incentivized its advisers through quotas and bonus pay to steer investment clients into fee-bearing loans and brokerage accounts. The report states that Wells Fargo Wealth Management’s quotas and representative incentives were similar to the illicit scheme previously employed by the credit card, savings, and banking division in the company’s prior scandal, which had produced approximately 3.5 million potentially fake or otherwise improperly opened banking accounts.
Specifically, investigators will reportedly seek to determine whether Wells Fargo made inappropriate or unsuitable recommendations involving 401(k) rollovers, alternative assets, estates, and trusts. Investigators will also look into rewards and referral incentives, such as an alleged 15%-of-first-year-revenue reward in multi-million dollar accounts offered to some retail bank employees for referring wealthy clients to the firm’s brokerage arm.
Officials expressed concern that Wells Fargo’s investment business improperly steered clients toward in-house investments that may have been more profitable for the firm, at the expense of its clients’ best interests. In addition to suitability violations, this could possibly point to a widespread breach of fiduciary duty involving Wells Fargo Advisors and other related Wells Fargo Wealth entities.
For example, a Bloomberg review indicated that Wells Fargo Advisors personnel often ran simulations through Envision financial planning software, sometimes without clients present, and by “plugging in numbers they knew would recommend investments that clients already held.”
According to one former adviser, the Envision simulations would then confirm the clients’ investment strategy at Wells Fargo, making the clients much more likely to remain Wells Fargo customers and keep funds invested in products preferred by the firm. Wells Fargo disputes that charge, claiming that Envision did not disadvantage clients.
As a historical note, the SEC and US Commodity Futures Trading Commission in 2015 charged JP Morgan Securities and JPMorgan Chase Bank with improperly marketing JP Morgan-managed mutual funds to retail customers through a Chase Bank program, failing to disclose this practice and the associated conflict of interest to its clients.
Like Wells Fargo, JP Morgan stood accused of inappropriately recommending in-house investments that were more profitable for the firm, at the expense of its customers’ best interests.
JP Morgan and Chase Bank ultimately agreed to settle the charges by paying over $300 million in penalties, disgorgement, and interest.