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By Katherine S. DiDonato, Esq. of Shustak Reynolds & Partners, P.C. posted on Monday, October 17, 2016.

Kara Siegel

Kara Siegel

Senior Attorney

As the fallout from Wells Fargo’s fake account scandal continues to mount, watchful eyes are now turning to Wells Fargo Advisors to see if similar aggressive cross-selling tactics by brokers violated FINRA rules. Complaints from Wells Fargo Advisors’ customers and a former manager are revealing that the aggressive sales practices, including the “Eight is Great” strategy which pushed each employee to get customers to have eight products, extended into the brokerage operation and may have led to unsuitable recommendations, misrepresentations, material omissions, and possibly breaches of the brokers’ fiduciary duty.

Wells Fargo bank is still reeling from the revelation that its employees created over 2 million fake accounts for its banking customers which led to $185 million in penalties. It was announced last week that CEO John Stumpf will forfeit approximately $41 million in unvested equity and will forfeit his salary while the investigation continues into the company’s retail banking practices. Federal prosecutors have also launched an investigation into Wells Fargo’s aggressive sales tactics, but it is yet to be seen whether criminal charges will be filed. California, Illinois, Chicago and Seattle have already halted dealings with Wells Fargo, including cancelling deals with Wells Fargo to underwrite municipal bonds and divesting government funds from the bank.

Wells Fargo has recently disclosed that customers opened 25 percent fewer checking accounts and applied for 20 percent fewer credit cards in September compared with the same time period last year, and that customer loyalty is down since news of the scandal broke. 

It remains to be seen what impact Wells Fargo’s damaged reputation will have on the brokerage side of the business. Experts speculate there will be a larger impact on landing new clients than retaining old ones, as clients’ personal relationship with their brokers is often more important than their opinion of the firm. The perceived difficulties in recruiting new clients while the scandal remains in the headlines could be a strong talking point for firms looking to lure away top sellers from Wells Fargo.

Wells Fargo Advisors recently issued a statement saying: “We recognize that the trust our clients place in our advisors and our company means everything; it’s the foundation of our relationship and the way we do business together. It’s important for clients to know that their investment accounts with Wells Fargo Advisors are unaffected by the events associated with the settlement agreements involving Wells Fargo Bank.”

Whether Wells Fargo Advisors will get out of this debacle unscathed is yet to be seen. Another top brokerage firm, Morgan Stanley, was recently charged with “dishonest and unethical” conduct by Massachusetts’ securities regulators for similar high-pressure sales tactics that encouraged its brokers to sell loans to their brokerage clients. Regulators allege that Morgan Stanley ran high-pressured sales contests where brokers could earn thousands of dollars by selling “securities based loans.” The contests were officially prohibited by Morgan Stanley, but proved to be very lucrative for the company, with loan origination rates tripling and $24 million being added in new loan balances.

Morgan Stanley vehemently denies any wrong doing, but regulators allege executives were slow to discover the contests, failed to shut them down immediately, and downplayed the risk associated with the loans. The regulators allege Morgan Stanley bred a culture of high-pressure sales tactics to cross sell banking products to its brokerage customers without regard for the fiduciary duty owed to the investors.

This increase in regulatory scrutiny over brokerage firm sales practices sheds light on whether it is appropriate for firms to set aggressive sales targets for employees. It will be interesting to see whether the intense pressure put on Wells Fargo brokers to cross sell products and emulate the “Eight is Great” strategy violated FINRA rules. Former employees say that cross-selling has always been a top focus at Wells Fargo Advisors, and the bank’s brokerage and wealth-management business reported 10.55 products per household at the end of last year, beating out the retail banking business, which posted 6.27 products per household at the end of June.

A former Charlotte-based manager at Wells Fargo Advisors has said the company was so focused on selling they preferred to hire people who had more sales experience and less brokerage experience. They would hire “kids off the street,” give them 30 days to pass their brokers licensing exam, train them on the phones and then send them off to sell as much as possible. If brokers didn’t meet their aggressive sales goals, they would not get their bonuses, would possibly get questioned by management, or ultimately replaced. This led to a high turnover rate and reinforced the “sell sell sell” culture.

Wells Fargo is currently facing probes from authorities ranging from the Department of Justice to the Department of Labor, as well as lawsuits from customers and former employees. FINRA has declined to comment on whether they will be the next to open an investigation into the faltering bank.

Shustak Reynolds & Partners P.C.’s FINRA attorneys and financial services lawyers in San Diego, Irvine, Los Angeles, San Francisco and New York have extensive experience representing brokerage firms, RIA firms, high-net-worth investors in a variety of securities disputes, including FINRA arbitrations, petition proceedings to vacate or confirm arbitration awards, FINRA and SEC investigations and enforcement actions. Contact us today for a confidential consultation.  

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