It was over two years ago that Wells Fargo’s fake accounts scandal burst into the headlines, and since then, there has been an unrelenting torrent of bad news. In late October, the American Banker reported that two executives were placed on leave after they received notifications of pending sanctions from the Office of the Comptroller of the Currency. In November, Federal Reserve chairman Jerome Powell sent a letter to Senator Elizabeth Warren saying the Fed will not lift a cap on Wells’s growth until the bank addresses deficiencies in oversight and risk management. “The underlying problem at the firm was a strategy that prioritized growth without ensuring that risks were managed, and as a result the firm harmed many of its customers,” Powell wrote.
In early November, Jay Welker, who was the head of the private bank, which sits within the bank’s wealth management business, retired. Under Welker, the private bank pushed wealth advisors to vigorously sell high-fee products. There may be more bad news about this aspect of the embattled bank. The Justice Department, the SEC, the Labor Department, and Wells Fargo’s own board are conducting ongoing investigations into its wealth management business that have yet to be resolved.
There’s still one aspect of how the wealth management business pushed for growth that former Wells Fargo employees say hasn’t gotten the scrutiny it should. For four years, starting in 2012 and through the end of 2015, Wells incentivized some of its advisors in that business through something called the “Growth Award.” Some former employees say these awards led to behavior that was not in the best interest of clients, including steering them towards higher-fee products. The Growth Award was much discussed internally, says a former investment strategist at Wells, although not everyone was privy to the details of how it worked.
Last summer, the Wall Street Journal reported the existence of the growth award, but not the details of how the money worked. Essentially, the growth award was a way of motivating advisors to grow their businesses. In and of itself, that isn’t unusual. The industry has for years offered successful brokers incentives, often in the form of elaborate trips to exotic locales.The SEC is weighing new rules that may curtail the use of such rewards under the theory that they could make brokers “predominantly motivated” by “self enrichment.” Firms have also long used rich packages to lure successful brokers to move their business.
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