Independent Fiduciary Consultant, Economics and Financial Ethics

One who intends to leave others better off for his having existed.

9/23/14

For the 400,000 plus Wells Fargo clients being lied to on their "Envision" retirement plans


I believe most Wells Fargo Advisors Envision financial/investment plans created to earn ‘retention’ bonuses appear to have defrauded the government after Wachovia and Wells Fargo merged while in possession of taxpayer funded TARP and other bailouts.  I believe Wells Fargo executive management defrauded the government by creating a illegal path to retain advisors after receiving government bailouts, by mandating a fraudulent path for advisors to acquire retention bonuses.  I believe Wells Fargo’s executive management created a backdoor retention program that led thousands of brokers to violate fiduciary duties to the firm’s clients, by incentivizing the omission of investment fees in Envision plans subsequently reported on client statements.

I have worked as a financial advisor since 1993, and have taught CPA and attorney financial ethics in North Carolina for the last 10 years.

On February 20, 2009, taxpayer bailed out Citigroup’s Morgan Stanley Smith Barney announced about a $2 to $3 billion retention plan to retain their securities brokers.  The same day, Wachovia Securities announced the firm's brokers would not receive a retention bonus, but financial advisors could receive payouts from its 4front program, which involved creating "Envision" investment/financial plans for current clients.

Janet Levaux of Advisor One reported “For 4front, advisors must complete financial plans using the company's Envision software for at least 25 households with $250,000 in assets under management...This makes our company a compelling place for advisors to stay and run their business," said Wachovia Securities spokesperson Anthony Mattera.  Halah Touryalai of Wealth Management.com reported “...the firm takes a “snapshot” to look at how many households and assets advisors have in Envision Plans. The more households and assets with “Envision Plans,” the larger the bonus a rep can receive.”

I chose not to apply/qualify for 4front until U.S. taxpayers were paid back money loaned through TARP.  When the first round of Envision plans were created, word came down from executive management imploring our office to not create too many Envision plans at the same time to keep up appearances.


Many Wells Fargo Envision Plans created to earn 4front bonuses did not include investment fees.  On September 7, 2012, in front of 25 to 40 financial advisors at the Hyatt Regency St. Louis at The Arch, Greg Shiveley, Envision Sales Manager at Wells Fargo Advisors, said “There are 441,942 households with Envision Plans of Record.” and “The overwhelming majority of Envision Plans do not include investment costs."  One reason so many Wells Fargo households have Envision Plans of Record (POR), was to avoid negative press coverage by obscuring retention bonuses after the company received overt and covert taxpayer bailouts.  If the average household with an Envision Plan had $400,000, about $177 billion of client assets may be involved.  If “the overwhelming majority of Envision Plans [did and] do not include investment costs,” and Plans of Record appear on client statements, hundreds of thousands of Wells Fargo clients are currently being illegally misinformed as to the probabilities of achieving their financial goals.



I violated my fiduciary responsibilities to clients with advisory accounts by not including investment fees in their Envision plans, along with thousands of other Wells Fargo Financial Advisors.  Wachovia Securities executives who visited the Greensboro’s 3623 North Elm Street Branch told a meeting of brokers that the retention program tied to Envision investment plans was set up to avoid critical press reports about TARP being money used to “retain” financial advisers.  We were told “do the plans and get paid.”

Envision plans can be manipulated to sell clients and prospects on new investment ideas, staying on a current course with a financial adviser, and with the "retention" plan, game compensation in violation of Investment Advisers Act of 1940.


These outcomes are repeatable, meaning this can be duplicated on any Wells Fargo Advisors computer by others investigating independently.

The following “Internal Use Only” document states: "If left at 0%, the Return Discount Rate will not be displayed on any Envision report pages.  If you choose a Return Discount Rate above 0%, this assumption will be displayed on the Investment Plan Assumptions report page."  Meaning if the "Return Discount Rate", otherwise known as annual investment fees aren't included, the information does not show up in the client presentation, even though inflation, tax and turnover measures do.


As shown after the third main bullet point below, "Return Discount Rate" was called “Annual Investment Fee” before 2012.



Example: Harold Lynn

The following shows a comparison of two reproducible versions of the same Wells Fargo Envision Plan with one difference - investment fees.



"Harold Lynn" has $1,000,000 invested, with an annual investment fee of 2.5%.

Both versions have the same data inputs, except the second plan doesn't include the investment fees, like "the overwhelming majority of Envision Plans.”  The first plan includes 2.5% annual investment fees, which Harold is currently paying.

Again, Investment fees are not shown on client presentations unless entered, as seen on the following pages, even though both presentations include everything else.  Notice "Return Discount Rate" under "Investment Assumptions"


Note the absence of the “Return Discount Rate” under the description of “Investment Assumptions” in the second version of the plan.


Section 206 of the Investment Advisors Act of 1940 states "It shall be unlawful for any investment adviser, …to employ any device, scheme, or artifice to defraud any client or prospective client;  to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; or...  to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative."

Without the investment fees included for Harold’s $1,000,000, Envision's software can generate the following client compliance approved graph indicating a high degree of wonderfulness if Harold continues to follow the recommendations.


The problem is the Envision Plan including what Harold is actually paying for his investments, is that he would need to begin with about $840,000 more to achieve similar results, meaning the plan not including the 2.5% annual investment fees clearly appears to be misleading.


The black dot on the Y axis of the charts indicates Harold's $1,000,000.

The two rising lines represent the “Target Zone”, which the software identifies as a “reasonable level of confidence that goals can be met or exceeded.”

The lowest lines in the graphs represent a 75% chance of reaching Harold’s goal.

The lines are much higher on the bottom graph when investment fees are included.

Wells Fargo Advisor's Internal Use Only "Presenting Envision results that matter" states "If the client has any doubts about the underlying assumptions, Advisors should be prepared to provide clarity and rationale. Observe that this is based on “IF” the client has doubts about assumptions, which means advisors do not need to burden clients with a detailed explanation of the assumptions if they are not in doubt of your ability to understand their goals and priorities." and "If the client asks you how their confidence is measured, this will require a careful explanation but it should not be focused on mathematics. Instead, the focus should be on the results of the math."  And "If you fall into the red, above target zone, you are making needless sacrifices to your lifestyle...," meaning some clients may be spending more than they "should", if investment fees are not included in Envision plan target zone calculations.

The "Internal Use Only" document (0211-5064) also states "Although it may be unintended and clearly disclosed away, this report will serve as a guarantee (in the eyes of the client) of how reality should unfold. It illustrates what they should have in taxable assets in 2013, their tax bill in 2015 and their net portfolio withdrawal in 2020. No matter how many disclosures that are made, how else would you perceive this report if you were a client?" and "With the Envision process, the job is to focus on what matters: the client’s confidence and comfort in achieving the goals they value most. Presenting results that matter is what creates the confidence and comfort the client desires."

4front

Internal Wells Fargo Advisors web pages and documents say  “For credit in the 4front program, the Financial Advisor must designate an Envision profile in the Household as the [Envision Plan of Record] (POR).  This will identify the profile that was presented by the Financial Advisor and accepted by the client.  This requires that the plan reflects the client’s goals and risk tolerance, that it remains within the Target Zone...or has been within or above the Target Zone within the past 12 months...”

For many Wells Fargo Advisers, there was no way to both get the bonus and include investment costs.  I qualified with 27 households.  The minimum was 25.

To qualify for the 4front "retention" bonus, the black dot had to be above the bottom blue line, meaning the plan without investment fees would have qualified, while the other plan including fees wouldn't, meaning in overwhelmingly most cases, there was no way to both get the bonus and include investment fees.

Internal Wells Fargo Advisors web pages and documents say “The Envision Plan of Record (POR) review is a standard part of the Envision process and of 4front...  Prior to granting a 4front Level One award, PORs will be reviewed to ensure that they have been presented to the client, reflect the client’s current goals and priorities, and have been or are in the process of being implemented.”

FINRA Rule 2210 states "All member communications must be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular...service.  No member may omit any material fact or qualification if the omission, in light of the context of the material presented, would cause the communications to be misleading.  No member may make any false, exaggerated, unwarranted, promissory or misleading statement or claim in any communication.  No member may publish, circulate or distribute any communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading.”

If “The overwhelming majority of Envision Plans do not include investment costs," I believe many of the 98% of Wells Fargo Envision Plan clients cited in this advertisement really don’t know where they stand in reaching their financial goals.


FINRA Rule 2210 also states “Information may be placed in a legend or footnote only in the event that such placement would not inhibit an investor's understanding of the communication.  Members must ensure that statements are clear and not misleading within the context in which they are made, and that they provide balanced treatment of risks and potential benefits.  ...Members must consider the nature of the audience to which the communication will be directed and must provide details and explanations appropriate to the audience.  Communications may not predict or project performance, ...or make any exaggerated or unwarranted claim, opinion or forecast...  Any comparison in retail communications between investments or services must disclose all material differences between them, including (as applicable) investment objectives, costs and expenses..."

Recommitting Fraud

Wells Fargo Advisors mandated Envision Plans of Record be updated annually, forcing thousands of Advisers who didn't include investment fees to repetitively recommit fraud upon their clients in later years.  Internal Wells Fargo Advisors web pages and documents say “To receive credit for the review/update of an existing plan, you must …conduct a thorough review of client goals and account information, ensure that everything is up to date and that your advice is current.   If you discover that changes are needed, simply update the information, review accuracy and ensure that your advice is current and the plan is within or above the Target Zone.  A new Client Presentation or Progress Report must be generated with the past 12 months...[and] the plan is presented to the client and reviewed on at least an annual basis”, the results of which show up on client statements.

One of my assistants agreed to create the Envision Plans for the bonus.  The next year she agreed to update them.  In September 2012, I couldn't ask her to do it again after internally and externally whistleblowing and receiving the following email;

"From: PCG Administration;  Sent: Friday, September 21, 2012 6:45 PM To: Hartzman, George;  Subject: 4front Level One Long Term Standard of Care - August 2012 Status - Hartzman, George H - A254477;  Importance: High 
…As previously communicated, FAs who received a 4front Level One award are responsible for maintaining the same level of retail planning and institutional service as awarded through the Level One award program.  …As part of the 4front Level One Award, FAs are responsible for maintaining the Long-term Standard of Care (LTSC) requirements.  …requiring FAs to maintain the same level of client POR planning…  
…Each year for the duration of the 4front Level One program, the firm will review FAs’ Long-term Standard of Care based on a snapshot of client households. (The 2012 annual snapshot will take place on Oct. 31 [2012])  There is no grace period; therefore, FAs should ensure they are tracking their level of planning throughout the year…”

Internal Wells Fargo Advisors web pages and documents also say “...The Financial Adviser must keep their plans updated and continue serving their clients.  On an ongoing basis, the plans will be reviewed ...and the plan must be continually adjusted so that it will keep the client on track towards achieving their goals. (This is measured by looking at whether the plan is within or above the Target Zone...)”  Wells Fargo could also “cancel existing awards” and terminate for “failure to adhere to the guidelines”

Section 36 of the Investment Advisors Act of 1940 states "The Commission is authorized to bring an action...alleging that a person ...is about to engage in any act or practice constituting a breach of fiduciary duty involving personal misconduct in respect of any registered investment company for which such person so serves or acts, or at the time of the alleged misconduct, so served or acted — as ...investment adviser...”

“...the investment adviser … shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company… to such investment adviser…  An action may be brought … by the Commission...against such investment adviser... who has a fiduciary duty concerning such compensation or payments, for breach of fiduciary duty in respect of such compensation or payments paid by such registered investment company...to such investment adviser or person.  …It shall not be necessary to allege or prove that any defendant engaged in personal misconduct, and the plaintiff shall have the burden of proving a breach of fiduciary duty."

I have chosen to speak out for my clients, family, students, country and colleagues, instead of living out a fraud.

George Hartzman
President and Chief Economist: Think Professional Education
Former Vice President/Investments
Fundamental Choice Portfolio Manager, Wells Fargo Advisors

Addendum

This journey began by providing an external email address and phone number to Wells Fargo's confidential ethics hot line, after which I was contacted on multiple occasions by investigators on my company email and phone.  Realizing my anonymity was compromised and my family’s safety at risk, I took the issues to my local manager, after which Wells Fargo's executive management enlisted an outside ‘independent’ investigator who promptly found no merit to my assertions.  Thinking I could mitigate personal risk by contacting regulatory authorities, I filed with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) DC Office of the Whistleblower which went nowhere.  I then filed with the NC Secretary of State Securities Division, who investigated and referred files to Atlanta's SEC and FINRA offices.  The financial plan/bonus matter went back to FINRA’s DC Office of the Whistleblower from Atlanta and on to Kansas City's FINRA regional office, where Wells Fargo Advisors home office is located.  And then nothing.  American regulatory authorities will not say whether a case exists or if a case is opened or closed, even though I contacted the government during and after interactions with Wells Fargo management, leaving myself and loved ones at risk of reprisal.

My employment at Wells Fargo Advisors was terminated on Monday, October 8, 2012 in direct retaliation for disseminating whistleblower information that our regulatory infrastructure seems unwilling to act upon and our mass media won’t report.  My “U5” states “Termination Explanation: Violation of the firm’s policies, including policies prohibiting the disclosure of the firm’s proprietary and/or internal use only information”.

3 comments:

Anonymous said...

thank you for posting this information

Anonymous said...

Same set up circumstances. Different company.
External # to Ethicspoint: ditto
Internal Investigation: ditto
Took issue to manager: ditto
HR Investigation: ditto
No merit to my claim: ditto
Dept of Labor WB Claim: ditto
SEC- ditto
FINRA- ditto
TX State Sec Board- ditto
Termination- ditto
Retailiation- ditto

Ivan Wong said...

I am an Envision Client with Wells Fargo. First of all, Mr. Hartzman's argument it is very informative, and I am thankful that these kinds of advisors still exist. How Wells Fargo used "no investment fee" as an advertisement indeed violates the fiduciary duty and misleading consumers.

However, while most of the Wells Fargo Advisors do not act under fiduciary capacity for the client, they do act in good faith (like Mr. Hartzman himself while he was employed by Wells Fargo, otherwise he would not blow the whistle on this). I would hope most of the Wells Fargo advisors are ethical enough to disclose the investment cost/fee to their clients and have the annual management fee clearly annotated on the contract. Even Madoff is a fiduciary, so the word itself really doesn’t mean that much.
My Wells Fargo Advisor, before he even told me about the plan, he disclosed all of the upfront cost (include the 1% annual management fee, all of the account transfer fee, and program initiation fee). I also look hard and long at each investment product and compare the cost analysis with my third party CFP. Most of the products are in par with other financial institute’s diversification (We compared the basic attributes include management fee, morning star rating, return/risk ratio, top holdings, crash stress, and 10 year performance).

If I can interpret this correctly, what Mr. Hartzman is arguing is that “there is no free lunch.” Someone have to pay the management fee! Although most affluent clients are ready and willing to pay that fee (unless they have absolutely no idea how much it takes to manage a mutual fund and a portfolio), not disclosing the management fee is surely a violation of trust between Wells Fargo and the client.

If your advisor is not telling you that the management fee is typically 1 - 2.5% of your portfolio (depending on the size of your asset), you need to beware of your advisor and not just the Envision plan.