Wells Fargo seems to be the soap opera of the financial services industry. A disturbing, and bordering on ridiculous, series of missteps, poor business choices, and down-right fraudulent activity is the Wells Fargo status quo. This week’s installment of the drama brought news that Wells Fargo is pulling out of Indiana, Ohio, and Michigan completely – as well as shuttering four locations in Wisconsin. The acquiring company for the Wells Fargo assets is Flagstar Bancorp, a savings and loan with a strong mid-west regional presence. Flagstar will absorb 52 Wells Fargo locations for a purchase price just under $2.5 billion, paying a 7% premium on the $2.3 billion in assets leaving Wells Fargo’s coffers.
On the surface, this latest Wells Fargo move may seem to be more fall-out from the mounting indiscretions which continue to plague the company’s reputation. Wells Fargo’s fall from grace began two years ago with their well-documented fraudulent account and mortgage scandals. In April of this year, Wells Fargo agreed to pay a $1 billion fine to federal regulators over mortgage and auto loan violations that resulted in customers paying extra fees. The $1 billion fine was the latest setback for Wells Fargo as it struggles to regain customer trust after a huge unauthorized accounts scandal. Last year, it acknowledged that it created about 3.5 million bank and credit-card accounts not authorized by customers, and it paid $185 million in penalties. The company is now suffering the consequences with home origination loans and sales plummeting 43 percent first quarter of this year and continued negative returns anticipated for the second quarter as well. The mortgage scandal also resulted in a Federal Reserve mandated growth cap for Wells equal to their December 31, 2017 consolidated assets of $2 trillion.
The mortgage scandal and continually surfacing acts of impropriety and customer fraud have also rained a tsunami of fines rivaled only by the hemorrhaging of the Well Fargo bottom-line. $7.1 billion in advisor managed assets have left Wells in the first quarter of 2018 alone. The firm has agreed to a $480 million class action fine over the mortgage scandal while simultaneously staring down the barrel of a $1 billion federal fine for the same mortgage debacle.
Most recently, in the last 30 days, the Wells unraveling has accelerated. 15 employees from the Wells public finance department offices in Chicago, New York, and Los Angeles were dismissed as the underwriting business for the firm has plummeted from a ranking of 5th in the nation two years ago to an 8th ranked position at present. Wells was found guilty in a class-action lawsuit brought by California mortgage workers and ordered to pay $97.3 million dollars. The company was fired by the Police and Fire Department Pension Fund of Chattanooga, Tennessee after admitting they erroneously collected $15,000 in fee rebates which should have been given to the fund. And, a new Federal investigation looms on the horizon as the Department of Justice is currently investigating the firm after Wells released a regulatory filing that the company is internally reviewing inappropriate referrals or recommendations made by staff related to 401K roll-overs.
In light of Wells Fargo’s continued Hall of Mirrors business practices and propensity towards slight-of-hand, it must then be considered that Wells Fargo’s Mid-West play is not what it appears to be on the surface.
At first glance, one might think that Wells Fargo’s Mid-West sale is an effort to cull their books of smaller offices of limited profitability, thereby raising overall profitability by retaining larger accounts which generally result in higher commissions. Yet, the logic of this doesn’t make sense when you consider that a 52 office Mid-West unload by Wells doesn’t even scratch the surface of their profitability, nor does it ease the managerial responsibilities or compliance workload required of the overall firm.
Another scenario to consider is that Wells has widely been regarded the firm for the mass-affluent, while other firms like UBS, Merrill Lynch, and JP Morgan and have been focusing advisors on swimming up-stream to larger more profitable clients. Therefore, it might be argued, that the Mid-West sale is a shift in the overall Wells business model as they practice what others have preached and redirect their efforts to a new client demographic.
However, at this stage, it is hard to take anything from Wells Fargo for face value. Wells Fargo is like a petulant child, the sincerity of whose words are hard to trust. As I routinely ask my 14 year-old son; What’s the real-truth? What will the next Wells Fargo play be? What new major news story is around the corner that will further impact clients and financial advisors? The fact is, it’s anybody’s guess as I suspect this story has yet to completely unfold. One thing is true, if you’re a financial advisor who’s concerned about firm headlines affecting your business, you should make sure you know where their exit doors are.
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