“This was a staggering fraud.” – Elizabeth Warren on Wells Fargo.
Back in 2013, the LA Times broke a story about the aggressive sales culture at Wells Fargo creating an ethical dilemma for many of the rank and file employees of the firm. An investigation was launched and last month Wells Fargo was hit with a $185 million fine by the Consumer Financial Protection Bureau (CFPB) for illegally opening upwards of 2 million fraudulent accounts for their customers over the past several years. In response, Wells Fargo fired around 5,300 low level employees that knowingly participated in the illegal activity and apologized to all of their customers for the actions of a few “bad apples.” Although the fine is the largest in the CFPB’s short history (established in 2011), it is a mere blip on the income statement of a too-big-to-fail, behemoth bank that generates over $20 billion in earnings every year.
Last week, NPR’s Planet Money aired a podcast about the debacle entitled The Wells Fargo Hustle. The most interesting aspect of the NPR podcast was that they were able to tell the story from the perspective of many of the rank and file employees at the firm. As previously referenced in the LA Times coverage, Wells Fargo had the reputation of being a boiler room environment where employees were expected to dial for dollars in order to meet stringent quotas. For Wells Fargo, that meant cross selling products (the main reason I ended my banking relationship with them several years back as I was sick of being sold on a new account every time I talked to someone at the bank) to new and existing customers in order to earn more fees for the bank and create stickier client relationships. Each sales rep (or “personal banker”) at Wells Fargo was required to sign up at least eight new accounts a day (the phrase drummed up by senior management was “Eight is Great!”) and twenty new accounts during the big New Year push (“Jump into January”).
If employees were unable to meet their quotas, they were shamed by their bosses in front of their fellow employees and received a formal warning with the threat of termination and a permanent mark on their financial service record (Form U5). This created an extremely stressful environment with a high degree of burn out amongst new employees. Unfortunately, some of the employees decided to bend/break the rules by opening up new accounts without their customer’s consent in order to hit their sales numbers. For example, a customer may have $10,000 that they want invested into a CD, but rather than opening up one new CD for $10k a banker would open 10 new CDs for $1k each. Harmless enough. But eventually this relatively benign activity morphed into tacking on personal lines of credits, credit cards, and/or multiple checking or savings accounts to an application without the client’s knowledge. According to the LA Times article, one former branch manager discovered that an employee at her branch had talked a homeless woman into opening six different checking and savings accounts each with monthly service fees!
“It all seemed worth the chance and the risk, rather than to deal with the mental abuse.” – Rita Murillo, former Wells Fargo branch manager
The sales culture was so intense that it was crippling. In the Planet Money podcast they interview a former Wells Fargo employee named Ashley who worked in the retail bank on the ground floor of the Wells Fargo corporate offices in San Francisco. She retells a story about one day when someone tried to rob the bank and was apprehended by police. Rather than sending everyone home for the day, her boss insisted that she meet her quota and continue making sales calls even though the branch had been shut down and the lobby was flooded with police officers. Eventually Ashley decided that her ethical responsibility outweighed her need for gainful employment so she quit her job. In response, Wells Fargo made good on their threat and essentially black-balled (or at least created a giant headwind) her from the financial service industry by indicating on her permanent record that she was released for “failure to perform job duties.”
In response to findings by the CFPB as well as the outcry from people such as Ashley that had first-hand knowledge of the situation, several Senators wrote a letter to the U.S. Senate Banking Committee demanding that they hold an immediate hearing to “fully investigate the matter.” John Stumpf the CEO of Wells Fargo agreed to appear in front of Congress to answer questions in regards to the recent scandal. Massachusetts Senator Elizabeth Warren, a well-known banking watchdog, was one of the Senators who signed the letter and was heavily involved in the Congressional hearing. Leading up to the hearings, she had gone on record several times stating that upper level management needed to be held accountable for this fraud rather than just pushing the blame onto a handful of low level employees. Although the hearing didn’t bring about any new indictments and at best was simply a form of public shaming, Ms. Warren was able to present her case about the lack of accountability for upper level executives on Wall Street. The video below is a one minute snippet of her criticism of Mr. Stumpf.
“Evidently your definition of accountable is to push the blame to your low level employees who don’t have the money for a fancy PR firm to defend themselves.” – Senator Elizabeth Warren directed to John Stumpf, CEO of Wells Fargo
Wells Fargo hasn’t seen the end of this debacle as some former employees and customers are suing the bank. Their reputation has obviously taken a large hit and they have even lost some major clients, but at the end of the day it is yet another case of a big bank getting caught doing something illegal and fraudulent with only a light slap on the wrist and no senior level accountability. This is just yet another example of the cancerous, winning at all cost culture that has pervaded Wall Street for decades and almost brought the global financial system to the brink of collapse less than ten years ago.
Stories like this one are painful for us because it is such a clear violation of the public’s trust. Unfortunately for firms such as ours, public sentiment usually doesn’t differentiate between large Wall Street banks being driven by an aggressive sales culture and any other firm in financial services. Stories like this one only add to the general distrust of the entire financial service industry. On the other hand, these types of stories are yet another reminder on why it is so important to understand whether the person sitting on the other side of the table handling your money is held to any sort of fiduciary standard (or better yet the CFA Code of Ethics) or simply trying to sell you product to make their quota and put food on their table. At Season Investments, we work every day to earn and maintain our clients trust as we understand that it is the lifeblood of our business. We don’t ever want our clients to ask the question, “Where’s the accountability?” Hopefully Wells Fargo and other sales-driven financial service companies will learn a valuable lesson from this debacle and shift their emphasis to doing what is right for the client rather than what is right for their pocket books.
Author Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.
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