The Derivative Project

Wells Fargo’s Cross Selling Conflicts Rampant in Wealth Management Too

Wells Fargo’s Cross Selling Conflicts Rampant in Wealth Management Too

Wells Fargo Cross SellingWells Fargo was cited by the Office of the Controller of the Currency, Consumer Financial Protection Bureau and Los Angeles City Attorney for fraudulently opening accounts, as reported by the New York Times, last week, Wells Fargo Fined $185 million for Fraudulently Opening Accounts.

The Senate Banking Committee plans an investigation into Wells Fargo fraudulent actions and requested the appearance of John Stumpf, Wells Fargo CEO at their committee on September 20th.

Mr. Stumpf has suspended some of Wells Fargo cross selling operations, but apparently not in their Wealth Management division that is generating record profits, through captive, one could deem monopolistic, sales of high fee mutual funds that generate excessive and predatory commissions for Wells Fargo brokers that sell to captive retirement investors in 401k plans and IRA rollovers.

Wells Fargo Cross Selling Strategy: Where there is Smoke there is Fire

While this may not rise to the level of fraud, it reveals a culture void of ethics, that preys on the less fortunate, often the impoverished, through outright deception.  Technology today provides every retirement investor the ability to access top performing registered investment companies, with low fees and performance that is passive or active, outperforming its relevant index, after all fees, with the proper education.  For financial institutions, such as Wells Fargo, to represent they are providing bona fide education and access to a secure retirement, through “sales” personnel, (deceptively labeled “advisors”) with flawed products and expensive, redundant intermediaries, may be deemed fraudulent misrepresentation to retirement investors.

Wells Fargo Retirement Target Date Funds Rated Negative to Neutral (**) by Morningstar

Wells Fargo 2025 Target Date FundLeft is the performance of Wells Fargo’s 2025 Target Date Fund, (dark purple line on the bottom of the chart) rated negative to neutral by Morningstar, with higher than average fees than the industry and poor performance, as compared to other Target Date Funds (TR Price’s 2025 Target Date Fund, for example) or other lower fee growth funds and aggressive growth funds, that have outperformed their relevant index over five years.  Over 10 years, retirement savers would lose significant amounts due to opportunity costs of being in a better performing investment product, not to mention loses from the power of compounding.  Below are Wells’ 2025 Target Date Fund fee structure, that include obsolete upfront sales loads of 5.75% and/or 12b-1 fees paid annually by struggling retirement investors for no added value. Wells Fargo's 2025 Target Date Fund expenses

The Fastest Growing Business In Wells Fargo’s Earnings May Surprise You

As a July 12, 2013 Forbes Opinion piece stated,

 “Wells Fargo had another record quarter thanks to a drop in expenses and improved credit quality, but the real sweet spot comes from its smallest business segment.”

But while revenue growth is an issue most big banks are struggling with (we’ll see how Bank of America BAC -1.10% and Citi cope with the issue next week) there is an area of steady growth that many are seeing–wealth management.

At big banks wealth management is the brokerage business where thousands of financial advisors keep relationships with individual clients looking for retirement and investment help.

It’s a very attractive business for a big bank because it can sell those brokerage customers not just stocks and bonds and other investment products but also its breadth of banking products like mortgages, credit cards, business loans and more. The more products a customer has with a bank the less likely he or she is to go elsewhere.”

However, as Barron‘s wrote earlier this week, “The Media Weigh in on Wells Fargo”:

“In a similar vein, Nicole Gelinas, contributing editor to the Manhattan Institute’s City Journal, writes in a special column for the New York Post that “If five or 10 or 50 random employees came up with a scheme to defraud their employer by opening false accounts, it would be hard to blame the bank: The bank would be a victim of its workers. But 5,300 workers — and more than 2 million accounts?

She adds: “This is systemic, pervasive behavior — including behavior that rises to the level of criminal fraud, real-property theft (by taking money from a legitimate account without permission) and identity theft, though the government oddly glosses over these crimes.”

Wells Fargo Cross Selling Schemes Enlist Support from Wells Fargo Fund Directors (Professors), Congress, Lobbying Groups and Non-Profits and Direct Payments to all these Entities

  •  I.  Use of Academics and Retirement “Think Tanks” to Promote their Cross Selling

(1)   Enlisting academics, from Wharton Business School, for example, to craft formulas to justify the use of a cross-selling sales force, that commands high and redundant intermediary fees,  places the retirement investor in a position where their savings is being depleted by unnecessary fees and poor performance, often 1/2 of every dollar saved for retirement going to Wells Fargo’s bottom line.  One questions the independence of the Pension Research Council when the Executive Director, Wharton Professor Olivia Mitchell, is a paid Wells Fargo Mutual Fund director.

  • II. Use of Non-Profits, Congressional Hearings, Lobbyists to Push a Cross-Selling Agenda, under the Guise of Societal Betterment for at risk women in retirement

(2)   Utilizing “non-profits”, such as WISER, with a mission to educate and designed to protect more vulnerable individuals in retirement, such as Hispanic women, is a key Wells Fargo cross selling venue, to peddle their most lucrative product, sales loaded mutual funds, that carry obsolete, redundant loads( 5.75% upfront) and/or annual 12B-1 fees.  High fees may be acceptable if they deliver exceptional performance.  Wells Fargo Target Date Funds deliver exceptionally poor performance, rated two star by Morningstar.

I.  Wharton Professor Olivia Mitchell, and Director, Wells Fargo Funds – Salary from Wells Fargo $250,000 Annually:  Professor Mitchell’s Formula to Justify Retirement Investors Use of Financial Intermediaries who Cross Sell Wells Fargo Products

Professor Olivia Mitchell, Wharton SchoolWe urge the Senate Banking Committee to also investigate material conflicts of interest between Wells Fargo’s Wealth Management Division’s cross selling techniques, and academics serving as Directors of Wells Fargo Funds, paid in excess of $250,000 annually, who create formulas to justify the role of these conflicted sales personnel in ERISA plans, deemed “investment experts”, when they have no experience, often no college degree, no training in investment selection, but have out-sized training in “cross-selling”.

Wells Fargo brokers are trained in sales/cross selling techniques and are not trained in investment management and investment selection.  However, defined contribution plans using Wells Fargo products and “brokers”  often represent these sales personnel are “investment experts”, which is a false representation.  From Financial Engines to Olivia Mitchell, Wharton Professor and Executive Director of the Pension Research Council, it is all detailed here in Oxford University Press, The Market for Retirement Financial Advice, December, 2013.  Professor Mitchell’s book is promoted by the Pension Research Council, where she serves as Executive Director.  Professor Mitchell’s academic formulas are simply designed to promote/justify financial intermediaries in the work place and a tool to generate cross selling revenues for firms such as Wells Fargo, Fidelity, Transamerica and Financial Engines, (who recently purchased the Mutual Fund store), to ensure they do not lose out on cross selling revenues outside the work place.

Market for Retirement Financial AdviceThe Senate Banking Committee can also look at the business model of Wells and Financial Engines to cross sell product, as additional revenues for their bottom line and question the added value of these intermediaries’ fees, when they are not offering “independent education” or the best performing mutual funds, at the lowest cost. The Department of Labor has mandated “investment selection” education since the beginning of defined contribution plans.  Employees pay for this biased education from sales personnel in their 401k plans and the industry claims, as in Professor Michell’s book, education does not work.  “Employees need intermediaries”, a claim based on a rampant conflict of interest.

From Blog. The Derivative Project posts in 2014 and taken directly from Professor Mitchell’s, The Market for Retirement Financial Advice, Oxford Press, 2013

The Whys of SuperNormal Profits Part I

The Whys of SuperNormal Profits Part II 

Professor Mitchell Wharton

The larger question for the Senate Banking Committee is not only unconscionable fraud, in account openings, but the ongoing deception by Wall Street and firms such as Wells Fargo, to retirement plan participants, of the role of sales personnel, deemed “investment experts” who have no investment training and a mandate to cross sell product for their employer—from mutual funds, to insurance, to annuities, to credit cards, with misleading labels by their employer and Wall Street firms, that these sales intermediaries are “trusted advisors”.  The financial  intermediary is labeled an “expert”, despite the fact they have no professional training, but cross selling. The role of the financial intermediary is to sell to retirement employees/IRA investors— not educate them on transparency and what investment product is in their best interest.

In sum, for an employer to label a Wells Fargo broker or Financial Engines “advisor”, an “investment expert” to their employees and to at risk women, is not fraud, but is deceptive and exceedingly costly to the average 401k participant and women in poverty, who need bona fide investment selection education.  Retirement participants need an understanding on who is best suited to manage their retirement nest egg,  not  “selling fees” that technology easily renders redundant today to any 401k participant, IRA investor or  particularly women who are most at risk in retirement.

Congress is pushing an Agenda that harms society overall to benefit the large financial institutions that have the resources to block independent education to ensure transparency and informed consumers.

II.  Wells Fargo Promotes Cross Selling Through Wiser, Women’s Institute for a Secure Retirement, Pushing High Fee, Poorly Investment Product, Breaching ERISA

We urge the Senate Banking Committee to follow the money and look at the unethical arrangements between Washington DC based non-profits, such as WISER, (Women’s Institute for a Secure Retirement) that are funded by Wells Fargo and other insurance companies, that sell high-fee, poorly performing retirement products(when lower fee, better performing retirement products are available). Congress must examine the  cross-selling strategies to at risk members of our society, under the gauge they are “helping” them, when the products offered are high fee and poorly performing.

Here is Wells Fargo’s “cross-selling” link at WISER‘s funders page, that links to Wells Fargo’s Auto/Home Loans, Investing and Insurance and, most ironically, to Wells’ “Fraud Information Center.”

The Pension Research Council, Social Security Administration, AARP, Wiser (Women’s Institute for a Secure Retirement) and Wells Fargo have enlisted the U.S. Senate, through Hearings,  to promote the use of Wells’ cross selling “advisors” to sell their products to help women who are the most at risk in retirement.  Wells Fargo pays for conferences, in conjunction with WISER, the Social Security Administration and AARP,  to introduce their cross-selling sales force to at risk women, under the guise of helping them., This is reprehensible.  A 5.75% load, to buy a poorly performing Target Date Wells Fargo mutual fund today, is not in the best interest of struggling Latina women, nor will it help them reach a secure retirement, it will hamper it.

Senate Republican Testimony Pushed an Agenda that Preys on Middle Class Savings.

Senator Klobuchar WISER HearingSenate Hearing on “Women’s Retirement Security” May 21, 2014, Vice Chair Senator Amy Klobuchar (D-MN)

Democratic Senator Amy Klobuchar (D-MN) promoted WISER, an organization that Preys on At Risk Women, through this Hearing,  through promotion of flawed investment product and costly Wells Fargo cross selling strategies.

WISER Event on Millennials’ Retirement - No surprise here that the main speaker is Wells Fargo’s head of Institutional retirement investing (401k) plans, joined by Phyllis Borzi of the Department of Labor

WISER September 20th DC EventSenate Banking Committee Members might want to swing by this WISER event co-sponsored by Transamerica and Met Life on September 2oth, after their Hearing with Wells Fargo CEO John Stumpf.  Now that defined contribution providers are forced to lower intermediary fees, due to the new Department of Labor pending fiduciary duty rule, it is time to focus on selling the more lucrative “life-time” income products, such as annuities.  Again, time to help out struggling women, a highlight in the Agenda, who they believe can be more easily duped into their high fee, poorly performing retirement products.

Wells Fargo Organizes Events to Promote their Investment/Insurance Products for Their Advisors Misrepresenting they are “Helping” Latina Women

2014 WISER Conference in Minnesota

Left is an excerpt from a Wells Fargo organized event teaming with newly-minted Wells Fargo female “advisors” or saleswomen to gain leads to cross sell high-fee, loaded Wells Fargo funds to women.  The event pulled together political “leaders”, such as MN Congressman Erik Paulsen, Financial Services Roundtable CEO, Tim Pawlenty (former governor of Minnesota) who introduced the financial services’ new campaign “Save 10″.  The Save 10 Campaign is to ensure “every corporation automatically takes 10% of every women’s salary so they can be financially secure at retirement.  Of course, every dollar saved for retirement provides 1/3 to 1/2 of every dollar saved, to Wells Fargo’s revenue base through their high fee loaded funds that take 5.75% upfront sales loads, not to mention high expense ratios (over 1.2% in their mutual funds).   So a Latina woman who has saved $49,999 in an IRA and invests through a Wells Fargo “Advisor”, pays Wells Fargo upfront over $2874, in addition to a 1.25% annual expense ratio and high portfolio turnover costs.

Wells Fargo Advisors are well aware this is a breach of fiduciary duty in an ERISA plan, since there exist better performing mutual funds, at lower cost, without upfront sales fees. However, these women are not provided the education to make an informed choice.  (AARP), our elected representatives, like Congressman Erik Paulsen (R-MN), Skip Humphrey, CFPB, Senator Amy Klobuchar (D-MN) –all endorse these predatory conferences that provide women no guidance as to where to go to get a low fee, top performing mutual fund for their retirement.

So while the Obama Administration is providing white papers that declare the cost of conflicted advice to middle class Americans is greater than $17 billion, The Cost of Conflicted Advice on Retirement Savings, Senate Republicans and Senate Democrats join forces with the very firms that provide the most poorly performing, high fee retirement products, through disingenuous non-profits, such as WISER, funded by financial services firms, captive non-profits and the financial services industry’s lobbying group, such as the Financial Services Roundtable.

The Department of Justice has an obligation to file criminal charges if there is fraud.  The Department of Justice has an obligation to intervene when there are monopolistic trends, harming society overall, that prevent price transparency and informed consumer choice.

Regulatory Capture Prohibits Bona Fide Price Discovery

Wells Fargo’s CEO and management know very well their Congressional contributions and their lobbying have permitted them access to Capitol Hill, to non-profits that push their predatory products, to Democratic Senators, such as Senator Klobuchar (D-MN,) that push their Agenda of high-fee product under the guise of helping struggling women in poverty and retirement. Why should their influence end now?  Mr. Stumpf is a life-long Minnesotan, garnering government and lobbying support, not only from Senator Klobuchar, but from Skip Humphrey (former CFPB- most ironically appointed to prevent Senior Fraud and Abuse), Rep Erik Paulsen (R-MN), and the Financial Services Roundtable’s CEO, Tim Pawlenty, the former Republican Governor of Minnesota.

Financial services firms believe they can do just about anything, including fraud in opening up sham accounts, to generate revenues, to fraudulent misrepresentation to at-risk women who are trusting that the “advisors” are providing them with the best performing mutual fund for their future retirement.  These at-risk women have been deceived and are currently being deceived, by Congress, AARP, CFPB, WISER and Wells Fargo.  Academic institutions, such as Wharton, have allowed their Professors to push an agenda that is not in the best interest of society overall.  It is an Agenda that solely benefits financial institutions.

Will the  Senate Banking Committee step-up on September 20th and expose the breadth and depth of the costs to society overall of the real fraud of sham accounts and fraudulent misrepresentation of a cross-selling Wells Fargo employee deemed a “trusted advisor”, which serves to prevent bona fide price discovery, a mandatory element of capitalism?