Wells Fargo fund business on the defensive amid sales scandal

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By Tim McLaughlin

<span class="articleLocation”>When a scandal over unauthorized accounts rocked
Wells Fargo & Co’s retail division last fall, executives
at its asset management arm sprang into action to limit its
fallout at an already tough time for their business.

A Reuters’ review of minutes from about two dozen state and
municipal pension board meetings across the country from October
to December showed Wells Fargo wealth management executives
offering apologies, weighing fee cuts and emphasizing their own
controls on staff hiring and vetting.

Joe Ready, head of Wells Fargo’s institutional retirement
plan business, for example, told trustees of the city of San
Diego’s defined contribution plan that participants’ $1 billion
in assets were walled off from other parts of Wells Fargo.

Last September, the bank said it reached a settlement with
the authorities over findings that its branch staff opened up to
2 million unauthorized customer accounts.

“Mr. Ready apologized for any inconveniences the recent
incident has caused. Mr. Ready confirmed that the retirement
plan accounts are not impacted by the recent events,” according
to minutes of the Oct. 6 meeting published on the city’s
website.

San Diego pension officials declined to comment for this
story. Wells Fargo declined to make Ready available and said it
would not comment on its interactions with specific clients, but
said in a statement:

“We certainly understand the concerns about what happened in
our community bank and have been in regular dialogue with our
investor clients regarding the settlement,” the bank said.

It is difficult to determine the scandal’s precise business
impact. Like other fund managers, Wells Fargo is grappling with
the seismic shift of money into funds that track indices. Even
before the scandal erupted investors had been pulling money out
of its funds.

Yet its fund unit has seen faster outflows than its peers
and the withdrawals accelerated in the last quarter of 2016.

Wells Fargo’s core mutual funds business, for example, had
the biggest market share decline among large U.S. fund families
in 2016, according to Morningstar Inc data. In December alone,
the funds recorded $7.1 billion in net withdrawals, two and a
half times more than second-worst performer.
(Graphic: tmsnrt.rs/2jYr0RH)

CYCLICAL UNDERPERFORMANCE

Asked to comment on the data, the bank said in a statement
it did not believe “there is a connection between our fund flows
and the September 2016 sales practice settlement between Wells
Fargo and regulators.”

“The recent underperformance of many active managers is
simply cyclical,” it added in the statement.

The bank declined to make executives available for further
comment.

In one case, however, the accounts debacle played a role in
a lost bid for new business.

The bank’s $482 billion asset management arm was among three
finalists to run a $40 million bond portfolio for Oakland’s
police and fire pension fund last fall.

The contract went to a firm with 17 employees and $1.5
billion in assets and David Sancewich, a consultant who helped
the pension fund with the selection, told Reuters the scandal
influenced Oakland’s choice.

“It was one variable as part of the decision process,” he
said in an email.

In another instance, however, Wells Fargo’s assurances
appeared to have had some mitigating effect. In Vermont,
administrators of Champlain College who considered dropping the
bank as an underwriter of a $77 million bond because of the
scandal, ultimately chose to stick with Wells Fargo following a
review of the bank’s operations.

When contacted, the college provided Reuters with a copy of
an October memo, which said it made the decision “following a
robust discussion,” while stressing that the school had no
relationship with Wells Fargo’s retail unit. Champlain declined
further comment.

To be sure, Wells Fargo funds business, which ranks 28th
nationally, plays a secondary role for investors, who focus more
on other, bigger divisions of the bank.

“It’s a small piece of Wells Fargo’s business and doesn’t
drive the stock price,” said Shannon Stemm, an analyst at Edward
Jones.

Still, at least in the immediate aftermath of the scandal
that led to a $185 million settlement and dismissal of 5,300
employees, some of the bank’s staff grappled with the
repercussions.

Employees at Wells Fargo’s institutional retirement and
trust unit were fielding about 75 calls a week after the
settlement from participants in pension plans in which the bank
acts as custodian or record-keeper, Ready told San Diego pension
officials at a special meeting in October, the minutes showed.

The callers wanted assurances that their money was walled
off from the retail banking operations, Wells Fargo executives
told San Diego pension officials.

One executive sought to distance herself from the head
office altogether.

At a Nov. 10 meeting of the North Carolina supplemental
retirement board, Carrie Callahan, a managing partner at
Galliard Asset Management, noted how Galliard was a subsidiary
of Wells Fargo but a distinct brand.

“She stressed that there had been no impact to Galliard’s
business due to the activity at Wells Fargo,” according to the
meeting’s minutes.

Callahan declined to comment. North Carolina officials were
not available to comment.



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