A recent Wells Fargo Advisors direct mail advertising campaign is being criticized by some for not being in the best interest of clients, who may not fully understand the securities-based lending it promoted.
Wells Fargo Advisors’ recently concluded promotion, in the form of mailed flyers, offered clients loans capped at 1.5% interest and collateralized with their securities holdings if they applied by October 31.
The direct-mail flyer helped Wells Fargo Advisors circumvent the spirit of the SEC’s Regulation Best Interest, according to Barbara Roper, director of investor protection at the Consumer Federation of America.
The SEC’s regulation requires broker-dealers “to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities.”
Those Reg BI obligations, however, arguably don’t apply when Wells Fargo Advisors’ clients, prompted by the direct mail advertising, initiate requests for securities-based loans, Roper says.
A workaround for Reg BI obligations may be what inspired Wells Fargo Advisors to dispatch the direct-mail advertising, according to Roper.
With the flyer, Wells Fargo “short circuits” the relationship between a financial advisor and a client, she says.
A Wells Fargo spokesperson defends the promotion.
The flyer was "only sent to qualifying clients and, as with any investment, we recommend discussing with a financial advisor to ensure it aligns with their long-term investment goals," the spokesperson tells FA-IQ in an email.
The spokesperson declined to provide additional details about why Wells Fargo Advisors sent the flyer directly to clients.
The flyer warns clients in smaller print: “Carefully consider whether securities-based borrowing is right for you. Securities-based borrowing has special risks and is not appropriate for all investors. If the market value of pledged securities declines below required levels, you may be required to pay down your line of credit or pledge additional eligible securities in order to maintain it; otherwise the firm will require the prompt sale of some or all of the pledged securities. The sale of pledged securities may cause adverse tax consequences.”
Borrow at your own risk
The flyer “has disaster written all over it,” says Andrew Stoltmann, a Chicago-based lawyer who is also a past president of the Public Investors Advocate Bar Association.
Securities-based lending is “an extremely lucrative line of business” for bank-owned brokerages, he says.
But “the leverage ramps up the risk for clients and there is a real possibility that many of the clients don’t understand the impact leverage or loans can have on their portfolio,” he adds.
“Given Wells Fargo’s track record of taking advantage of clients, it will likely end poorly for the firm and clients,” he says, referring to the bank’s past scandals.
Matthew Celenza of Beverly Hills, Calif.-based Boulevard Family Wealth says securities-based borrowing sometimes makes sense, depending on the interest rate environment, for example. Celenza and his team’s $1 billion in client assets left Merrill Lynch in 2017, according to his BrokerCheck record, to join the RIA network of Dynasty Financial Partners.
“In this environment, especially when interest rates are low, if you can borrow off your portfolio to do something to invest in a business or to do something else that you’re wanting to do outside of your portfolio, it’s a great opportunity,” he says.
But investors must have the means to cover the loan when markets fall and the value of the securities collateral is impacted, according to Celenza. “Be fully aware that if something goes wrong in the market and that interrupts the acceptable maintenance payments of the loan, you have to have the ability, outside of that portfolio, to pay it off,” he says.
By distributing a flyer, Wells Fargo Advisors is “glamorizing a very intricate borrowing strategy that could have very detrimental downsides,” Celenza says.
Editor’s Note: Story updated at 3:45 p.m.
On Tuesday afternoon, Kim Yurkovich, vice president of media relations at Wells Fargo Advisors, provided FA-IQ with additional information about the flyer and the guidance clients get from FAs when opening a securities-based loan.
The flyer included a separate box instructing clients to contact their financial advisors to discuss whether it is in their best interest to pursue a securities-based loan, Yurkovich tells FA-IQ in an email.
"This is standard practice, as with all of our direct-mail communications to clients," she adds.
Prior to having clients open a securities-based loan, Wells Fargo Advisors FAs "are required to document" the clients' best interests for doing so, Yurkovich says.
That documentation procedure includes having the FA address seven questions, covering such topics as: the clients' understanding of the loans' risks, how they fit with their overall financial goals, repayment plans and "overall experience" with such loans, according to Yurkovich.
A "qualified supervisor" reviews the notes from that documentation procedure for quality and completeness, prior to the opening of loans, she says. Wells Fargo FAs are also required to complete training on securities-based lending, she adds.
"We review ongoing changes in each client’s financial position and communicate with FAs to reassess suitability and best interests of the client, and document the outcomes. Policies on the amount, concentration, and use of proceeds for collateralized accounts are strictly enforced by the firm," she says.
Wells Fargo Advisors also sends alerts "reminding FAs of the risks of securities-based lending, especially in volatile markets," she adds.
Yurkovich notes that are no fees "to open, carry, or close a Wells Fargo Priority Credit Line," which is what was being promoted in the flyer.
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Cetera Advisor Networks, LLC Nov. 3, 2020 at 05:33 PM EST
TOOK THE CLASS BUT CANT SEEM TO GERT LOGGED IN FOR EXAM?