Wells Fargo, plagued by broker defections after its 2016 scandal, makes splash after new CEO green-lights generous, innovative succession funding with a Mark Hurley twist

Wells Fargo & Co. is still bleeding advisors from its very-public 2016 scandal, but under a new advisor-minded CEO, Charles Scharf, it's taking an aggressive, high-risk, new approach. It's keeping old brokers in place by assuring young brokers will have the ready cash to buy them out at a decent price.

But the jury's still out on whether the odd play will go down as a desperate move by a brand-tarnished desperado -- as many skeptics suggest -- or if it's a case of necessity mothering invention where it is sorely needed.

If Wells Fargo succession plan-cum-retention-bonus scheme proves a net positive, it could establish a baseline succession for a wirehouse channel plagued by high turnover. 

The stakes are higher for the San Francisco-based bank and brokerage firm because it's steadily lost advisors since the scandal. Its ranks are now down to 13,512 from nearly 15,000 four years ago. See: How Wells Fargo is using 'counter-punch' to get unheard-of upper hand in the poaching wars with Morgan, Merrill and UBS 

Ironically, in 2009, Wells Fargo was the one wirehouse that didn't indulge in massive retention bonus programs.

Wells Fargo launched the Summit Program in April, offering six-figure bonuses to retiring and younger advisors. It's considered one of the most generous succession plans in a brokerage industry where most agree that's a low bar.  So far 1,000 advisors have bought into it, according to the company. 

Difficult to assess

What moves the generosity needle is that the program ensures sellers leave with at least 125% of the value of their firm and, for the first time, gives traditionally cash-poor acquirers -- i.e. younger, less-proven -- producers up to 100% of the value of the firm they're purchasing in the form of a loan or bonus.

This succession-minded scheme of funding next generation advisors to buy out retiring advisors is only now being applied on a wider scale in the RIA business. Mark Hurley largely pioneered it with his Fiduciary Network to great success with firms like Regent Atlantic, Evensky & Katz and Brouwer & Janachowski.

Wells Fargo confirmed that all of its advisors are eligible for the program.

Yet, Wells Fargo is blocking at least one key metric from view -- at least for now. It declined to reveal how many assets the program's 1,000 acquiring and selling advisors manage and the ages of brokers on either side of those transactions.

The lack of transparency makes it difficult to tell if it's a success, says Danny Sarch, a  recruiter and president of Leitner Sarch Consultants. 

"That's my frustration with all of these firms... the lack of transparency. When they report something, you wonder what it really means. You have no idea the average age of people who signed up or the average production level," Sarch says. 

Louis Harvey, of Dalbar Inc. in Boston, says Wells Fargo is applying a micro solution to a macro problem.

"Advisors are leaving because they are losing clients, not because they are underpaid for the ones that remain,” he says.

Client factor

Harvey explains that Wells Fargo has major brand-issues and is still losing clients who simply aren't happy with the firm. “It seems that they have sweetened the deal but have not addressed the main problem.”

Louis Diamond, principal of Diamond Consulting, which recruits for Wells Fargo, maintains that the wirehouse's retention package is innovative and a significant improvement from past deals.

"They're offering more to the retiring advisor, and it's unique that they're kicking in a bonus to the inheriting advisor. They're putting money in these deals." 

In the end, however, succession is ultimately up to the clients, Sarch says.

“The tricky thing is clients have their own minds. Just because the broker and firms agree, doesn’t mean the client wants to stay." 

The program's effectiveness will shine through as advisors continue to age, says Wells Fargo spokeswoman Shea Leordeanu.

"As the average age of advisors across the entire financial services industry is in the mid-50’s, we anticipate that the number of retirements will increase every year throughout the industry. That was our impetus for creating Summit."

Wells Fargo has a history of creativity in creating advisor channel choice -- most recently upping its RIA mapping.

It fomalized ties with small RIA custodian Trade PMR to help advisors become RIAs. Wells Fargo also has FiNet, which has been leading IBD. See:  Wells Fargo finally gives its 600 hiring managers an RIA channel to sell but still with the Trade-PMR brand

"FiNet is definitely part of our unique multi-channel model here at WFA. We offer advisors the opportunity to work in community banking branches, our new Private Wealth FA group (high net worth focus), our WFA-branded branches (the advisor-led channel), as independent business owners in FiNet," Leordeanu says.

"And – now – as a fee-only RIA using the custody services we offer in conjunction with TradePMR. No other company offers as many channels for both advisors and clients,"  she adds. See: Wells Fargo now has a testing paw in the RIA stream

Handcuff play

Wells Fargo is indeed playing to an advisor psychological default -- doing what keeps life easy and low risk, says Scott Smith, of Boston-based Cerulli Associates. See: FiNet welcomes six wirehouse defectors at the apex of a withering Wells Fargo bank scandal that 'has legs'

"While some advisors may be able to garner a higher exit award multiple by moving to a more independent channel, such a move can be fundamentally disruptive to the advisor and their clients," Smith says.

He adds: "As presented, the Summit Program offers advisors a path of least resistance to a reasonable payout," Smith says. 

It’s still a handcuff play, but disguised as “continuity” says Ryan Shanks, CEO of Finetooth Consulting.

“This is a nice bump to advisors looking to retire, and it's structured with the sole purpose of retaining these advisors, which is critical.

"The reality is that advisors who are independent can garner a higher purchase price, but they often struggle with actually pulling the trigger and retiring as their payout ratios are so high.”

Dennis Gallant, of the Aite Group, says Wells Fargo has been more vocal about its plan because the company has lost advisors.  

“I think all firms have some incentive program. It’s not new. I think they’ve been more vocal, and they’re adding more incentive. They’re adding 25 basis points to fade out and incenting advisors to acquire. Firms are always hesitant to come up with a formal program to pay to acquire.”

Sources say Wells Fargo, three years after the scandal, is doing everything it can to keep advisors on staff.  

"It seems like they are going above and beyond to retain advisors with this retirement program success and their mega recruitment deals," Diamond says. 

But Smith says the effort is an "incremental improvement" at best. 

Bonuses 

Here's how the program works: Wells pays retiring advisors a special "loyalty award" that is 25% of their previous year's fees and commissions. The acquiring and retiring advisor will negotiate a sales price, and Wells Fargo will add 25% to the deal up to 200% of the advisor's valuation. 

For instance, if the purchase price were $500,000, Wells Fargo will pay 25%, but for no more than 200% valuation of the firm, even in circumstances where a buyer agrees to pay more than the firm's valuation.   

Assuming, the advisor's fees and commissions for the past 12 months were $500,000 and the buyer and seller agreed to a 100% buy-out, the negotiated succession valuation is 125% or $625,000. The acquiring advisor will pay 100% of that amount and Wells Fargo will pay 25%. 

However, what's really unique here, sources say, is the acquiring advisor can gain a bonus with an optional loan to assist in the purchase of the retiring advisor's book of business up to 100% of its valuation.

In the example above, that means the purchasing advisor would receive $500,000 in two installments of $250,000 each from Wells Fargo. If the acquiring advisor takes a loan, it lasts for ten years. If the advisor were to leave Wells Fargo, they would need to repay that loan first.

The program encourages the retiring and buying advisor to work together for a few years to ensure clients are happy with the new advisor, Leordeanu says.

Dangling that 25% carrot to retirees and helping traditionally cash-poor acquirers purchase the practice is significant, says Gallant

“They’re paying you to retire and acquiring bonuses for the purchasers,” Gallant says. “In the past, they always wanted to retain assets. Now, with more aging advisors they need a definitive plan. This is an opportunity to accelerate the changing of the guard.”

Scandal's toll

Wells Fargo has a lot of ground to make up. 

Three years ago, the bank was rocked by allegations that millions of fraudulent savings and checking accounts were created without the consent of customers. Among other things, the scandal touched off an advisor exodus. More than 1,000 left the company.

Ultimately, the bank was fined $185 million and CEO John Stumpf resigned on Oct. 12, 2016. More than 5,000 employees were fired as a result of the scandal. He was replaced by replaced by then President and Chief Operating Officer Timothy Sloan.

When Sloan's leadership proved uninspired, Scharf got poached in from BNY Mellon to inject energy and ideas. See: In RIA custody milieu, Charlie Scharf's BNY Mellon exit for Wells Fargo is latest unforeseen vapor trail 

Scharf's tenure atop BNY was short but he established a better-than-average grasp of financial advisors. His brother is an RIA. See: BNY Mellon's new CEO is an RIA fan, and Pershing Advisor Solutions made a big personnel move to reflect it

The scandal's impact was reflected in the company's fourth-quarter financials. Profits fell 53% to $2.9 billion from a year earlier, missing analysts' expectations. But Wells Fargo is still one nation's largest banks with assets of nearly $2 trillion and 261,000 employees. 

Whether Wells has recovered from the scandal is difficult to assess, Sarch says.

Half-truths

"I guess it's like a wound that is scabbed over and can be opened very easily. Advisors don't naturally trust. You can't blame them. They've been rarely given the whole truth, and sometimes people above them don't know the whole truth."

In its earnings call on Tuesday, the company reported that it lost 211 advisors in the fourth quarter. Leordeanu downplayed those numbers saying many of the losses were actually due to retirement. 

She says her company is rebounding quickly and had the best recruiting year last year since 2016 - in terms of the type of advisors her firm brought on.  

She says the commission and fees were up 40% over the previous year, but did not say how much of that was due to market appreciation. 

She says the firm's hires in the fourth quarter had an average production of $717,000 compared to an average production of $565,000 in 2018. The advisor's production is the amount of revenues generated during that period. 

"We are optimistic about our recruiting prospects for 2020," she says.