Two weeks ago, Wells Fargo, one of the nation’s largest banks, was fined $185 million for opening up bank and credit card accounts for customers without their approval, as well as phony accounts for fictitious people.
Even if you are not a customer of Wells Fargo, this development is relevant for two significant reasons:
- It is another reminder of the risk of investing in a specific company, as even ones with previously good reputations can get hit with unexpected bad news, which can hurt their stock price.
- You should always understand how a bank, financial advisor or stock broker is being paid or incentivized to provide, sell or recommend a product, account or investment advice.
Wells Fargo is now under intense scrutiny and criticism for the actions of thousands of their employees who apparently acted improperly in an effort to meet aggressive sales goals and quotas.
As a result of this news becoming public, their stock has fallen. What is unknown is the impact of these events on the company’s future earnings and business reputation, and thus, Wells Fargo stock. Will they lose customers? Will potential new customers go elsewhere? Will top executives lose their jobs? Even if top executives don’t lose their jobs, this will certainly be a major distraction for Wells Fargo.
This is another example of why our firm’s stock investment philosophy is notbased on individual stock picking. Until the huge penalty announcement, this bad news was not factored into Wells Fargo’s stock price. Wells Fargo previously had an excellent reputation as a well-run financial institution.
We recognize that it is not possible to predict bad news like this, which is why we recommend owning a broadly diversified set of funds. This way, you are not hurt as much by the risk of bad news affecting a single company’s stock.
Incentives, commissions and trust
Wells Fargo employees were under pressure to generate account openings and new credit card accounts. They had sales goals and were incentivized to “cross-sell” products, even if it was not in their customers’ best interest. As a large publicly held company, Wells Fargo had growth targets which certain employees had to meet.
Warren Buffett’s Berkshire Hathaway is by far the largest shareholder of Wells Fargo stock, with nearly 10% ownership. Buffett has yet to speak publicly about these incidents, but many years ago he made the following statement, which is shown at every annual shareholder meeting: “Lose money for my firm and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”
At our firm, WWM is compensated only by the management fee which is clearly disclosed to you during our initial meeting(s), as well as in the Investment Advisory Agreement (IAA) which all clients sign. We do not make more money for recommending a specific fund, bond or any other investment. We are fee-only investment advisors, which means you are not charged a sales commission or “load” when we buy or sell any investment on your behalf. We are proud that our firm meets a high “fiduciary standard,” which requires us to always act in your best interest. Period.
Most banks and large brokerage firms are compensated very differently than how WWM is, for investment advice or products. We are very transparent and clear about our fees. Most of these other firms do not clearly explain how customers are charged or what incentives may exist for certain products or investments they recommend.Most of these firms do not meet the high fiduciary standard which WWM adheres to.
For example, banks and insurance companies often recommend annuities to their customers, but they do not clearly disclose the commissions of up to 8% or the surrender charges you may incur if you don’t hold the annuity for many years. Brokerage firms may not charge a commission on a bond purchase, but they don’t tell you they “marked-up” the price to make a profit on the transaction.
Compared to many of the issues and causes of the 2008-09 financial crisis, the Wells Fargo actions are not nearly as bad. However, the cause of the Wells Fargo penalties, such as employee sales incentives and lack of transparency, are still symptomatic of many large financial institutions.
You should feel confident that as your financial advisor, we have no hidden fees and no sales incentives. When we provide advice to you, it is based solely on what we think is best for you and your family. Our actions and advice are not motivated to meet a revenue quota.
Our advice and service are motivated to develop and maintain very long-term, trusting relationships. Good things will follow from that, for you, our clients, as well as our firm.