The sales scandal rocking Wells Fargo & Co., one of the largest U.S. banks by market capitalization, has not trickled down to its $480 billion asset management business — yet. But that could change soon.
The City of Chicago’s finance committee voted on Wednesday to suspend Wells Fargo and its subsidiaries from doing business with the city for one year. This includes underwriting activity, brokerage services, financial advisory services and other types of business. The news follows decisions from California and the state of Illinois to ban Wells Fargo from underwriting municipal bond issues and other deals, for example.
On September 8 the Consumer Financial Protection Bureau fined Wells Fargo $100 million for illegally opening credit card and deposit accounts in the names of unsuspecting consumers. The CFPB said bank employees were spurred by compensation incentives and sales goals to open 2 million bogus accounts. The bank will also pay a $35 million fine assessed by the U.S. Office of the Comptroller of the Currency and a combined $50 million to the City and County of Los Angeles.
Wells Fargo CEO John Stumpf was grilled for hours by irate members of Congress at a Senate Banking Committee hearing on September 20 and again on September 29 at a House Financial Services Committee hearing. Stumpf endured his most stinging rebuke from Massachusetts Senator Elizabeth Warren, who declared, “You should resign, you should give back the money you took while this scam was going on, and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission.”
Wells Fargo Asset Management was not involved in the scandal, but the imbroglio raises issues of trust for pension funds, endowments, foundations and wealth managers that recommend Wells Fargo investments to their clients. Investment management clients don’t like uncertainty.
“Headline risk matters,” says Jonathan Grabel, CIO of the Public Employees Retirement Association of New Mexico. He emphasizes that examining a manager’s ownership and possible conflicts of interest is a continuing part of due diligence.
Wells Fargo Asset Management is the product of acquisitions stretching back at least 20 years, including the bank’s purchase of Norwest Corp. in 1998. In 2005, Wells Fargo purchased Strong Capital Management; three years later it acquired Wachovia Bank during the depths of the financial crisis. Wachovia’s asset management arm, Evergreen Investments, was merged with Wells Fargo Asset Management.
Stumpf has said he wants to grow the asset management business, and in April he hired Kristi Mitchem from State Street Global Advisors to run it. Wells Fargo Asset Management has already made some notable acquisitions; it finalized the purchase of well-regarded quantitative firm Analytic Investors, with $15 billion in assets, on October 1.
It remains to be seen whether more pensions will follow Chicago’s lead and put Wells Fargo’s asset management arm in the hot seat. At the very least, seeing critics calling for Stumpf’s resignation — as well as a complete overhaul of the bank’s flawed culture — doesn’t help. For its part, Wells Fargo Asset Management says the parent company’s problems are a separate matter.
“As fiduciaries for significant pools of capital, many of our clients have asked us whether or not the events in the community bank impact our ability to deliver strong risk adjusted returns over time. The answer is that they do not,” said Mitchem in an e-mailed statement.
New Mexico’s Grabel says he tries to strike a balance between being cognizant of headline issues and not letting them overwhelm his mission as a long-term investor. But the scandal at Wells Fargo has affected other parts of the company’s business. Mitchem says she is confident in the firm’s risk, compliance and operational strength and in its investment acumen, and she says the firm’s clients agree. “Helping our clients achieve their investment objectives is and will remain our primary mission,” she says in the statement. “Importantly, clients that have engaged with us in recent weeks are choosing to remain with us.”
But whether that will continue to be the case is an open question, observers say.
“It’s entirely possible that what is happening with the bank will have an echo effect on Wells Capital,” says Carol McFate, chief investment officer of Xerox Corp. It could lead to a talent exodus, she adds. “Is that a good environment to hold on to asset management talent? I certainly think it makes it harder.”
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