Conflicts of Interest Still an Issue in the Finance Business

November 1, 2016

The appalling incident involving over 2 million customers of Wells Fargo Bank (where client accounts allegedly were created illegally and money transferred without customer knowledge or approval) over the past weeks illustrates that customer diligence and government regulatory oversight are still sorely needed in the finance world.  When the story broke, Wells Fargo fired 5300 employees involved in the scandal, (I wonder how many of these were higher-level executives that turned a blind-eye to the negative aspects of the sales incentive program?), paid $185 million in fines and returned $5 million in customer money, all with a meaningless ‘mea culpa’ from its top executives and a promise to behave better.

On Tuesday, September 13th, Wells also announced they were discontinuing the sales incentive program that encouraged the rogue behavior in the first place.  Fine, I suppose, but that horse left the barn a long time ago.  (And why: “Effective January 1st”?  Why not: “Effective immediately”?) Wells Fargo was actually famous (and lauded in some circles) for the practice of “cross-selling” financial products to their customers; as many as eight different account relationships per customer was their apparent goal. The bank reportedly even had a special title for their program (so-called “Gr-eight Initiative”) and ex-employees are coming forward to discuss the intense management pressure on them to reach sales targets.  What makes this particular issue so egregious is the victims of this weren’t even aware their accounts were fodder for Wells Fargo’s profit objectives until the Consumer Financial Protection Bureau investigated and found the massive wrongdoing over the past five years.

The lesson and theme to all of this is simply this: Compensation incentives tied to a financial product sale carry a large conflict of interest risk to the consumer/purchaser.  In other words, if the person offering the product doesn’t get paid if you don’t buy or is under pressure to meet a quota target to keep their job, then the potential buyer needs to be doubly-careful that the product is indeed a worthwhile purchase and the salesperson is holding their interests first and foremost. Such sales incentives or even “sales contests” have no place in the financial profession.  Interestingly, after years of wrangling with the financial industry, the US Department of Labor is now flexing their oversight muscles to hold financial professionals to a fiduciary standard when working with employees and retirement accounts, meaning putting the client’s interests first.  You’d think this ethical standard would be the default code for the financial industry, but apparently it took a non-financial Federal entity to bring the age-old problem to the light of day.

This is not to say that all financial products are bad, that anyone offering a financial product is not worthy of your trust or that those who offer just advice for a fee are above scrutiny and careful consideration.  There are rogues in every gallery.   What the Wells Fargo affair does is remind all of us that vigilance is always and everywhere needed in your financial dealings and while there are many trustworthy and ethical professionals and institutions out there, longevity, size and brand name are often not enough reassurance that your best interests are the priority.  Continued consumer vulnerability in the financial world also shows why having a trusted financial professional to help you understand potential schemes is so valuable.