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Wells Fargo Wealth Profit Off 37%, Broker Counts and Bank Referrals Fall – AdvisorHub

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July 13, 2018

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Wells Fargo & Co. said Friday that second-quarter net income in its wealth and investment management division plunged 37% from a year ago, and 38% from this year’s first quarter, as brokers continued to leave, regulatory and technology expenses rose and referrals from its retail bank to advisers fell.

The San Francisco-based bank, which reported lower-than-expected revenue and profit companywide, said that repercussions from the fake-account and loan scandal that has plagued it since the fall of 2017 led it to set aside $114 million to refund wealth-sector customers who may have been overcharged fees over the past seven years. A third-party review of wealth  sector accounts is continuing “to determine the extent of any additional remediation,” it said in a news release.

The company also said that the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency have offered to allow it to pay $1 billion in penalties to settle risk-management issues and sales practice violations involving car insurance policies and extending interest rate locks on mortgages.

Profit in the wealth and investment management sector, which includes the company’s Wells Fargo Advisors brokerage unit and its retirement and asset management businesses, fell 37% from the second quarter of 2017 to $445 million, while revenue was down 6.5% to $3.95 billion.

The company’s financial advisor ranks across its private client, in-bank and independent brokerage channels declined by 173 over the three months ending June 30, Wells said, without breaking out the channel losses. Over the past 12 months, the company’s advisor count has declined by 301, or 2%, to 14,226 brokers, despite a program that pays outside recruiters premiums for attracting brokers to the firm.

The one metric that Wells highlighted in its second-quarter wealth sector report was the growth of advisory account assets by 8% to $543 billion from the year-earlier quarter at Wells Fargo Advisors. It attributed the jump primarily to “higher market valuations.” During the second quarter, the Russell 2000 index gained 7.5%, the Nasdaq Composite was up 6.3% and the S&P 500 jumped 2.9%.

Expenses throughout the wealth and investment management sector, the smallest of Wells Fargo & Co.’s three business lines, rose 2% from this year’s first quarter, due to the $114 million fee-rebate reserve for “certain fiduciary and custody accounts as well as higher regulatory, risk and expenses,” Wells said in an earnings supplement.  Expenses were partially offset by “seasonally lower personnel expense and lower broker commissions,” it said.

Total client assets across the wealth and investment management business rose 3% from a year ago to $1.9 trillion, again driven by higher market valuations, the company said. Referrals among Well’s retail banking network and the wealth business were flat with the first quarter and down 5% from the second quarter of 2017.

Regulators and consumer advocates have attributed the fake-account scandal that led to the opening of thousands of unasked-for consumer checking accounts, credit cards and car loans to a hyper-charged sales culture that encouraged cross-selling to help meet sales quota.

Wells Fargo has replaced most of its board and several top executives, including its chairman and chief executive John Stumpf and opened reviews of all of its business practices.

The company said Friday that it also reserved $140 million in the second quarter to rebate to foreign-exchange customers “as part of our efforts to make things right and rebuild trust.” Pricing on forex transactions over the past seven years, “while consistent with contracts entered into with those customers, does not conform to our recently implemented standards and pricing,” the bank said.

Wells Fargo’s overall profit in the second quarter fell 11% to $5.2 billion from $5.9 billion a year ago, and earnings per share and revenue results missed Wall Street analysts’ consensus expectations. Shares of Wells were down 3.25% in morning trading following release of the earnings report.