Wells Fargo Advisors Financial Network LLC has agreed to pay $35 million in a civil penalty to settle charges that for two decades it overcharged 10,945 accounts of advisory clients $26.8 million, the Securities and Exchange Commission announced today.
The firm, which was also censured, didn’t admit or deny the charges, but had already reimbursed affected clients about $40 million in payments and interest in 2022 and early 2023, the SEC said.
According to the settlement, from at least 2002 through December 2022 Wells Fargo overcharged advisory clients by failing to honor lower negotiated fees offered to its clients and the legacy accounts it acquired from Wachovia and AG Edwards, the agency said.
“For years, Wells Fargo and its predecessor firms negotiated reduced advisory fees with thousands of clients, but failed to honor them, overcharging those clients millions of dollars as a result. Today’s enforcement action underscores the need for firms growing their businesses through acquisition to ensure that their growth does not come at the expense of client protection,” Gurbir S. Grewal, director of the SEC’s Enforcement Division, said in a statement.
Advisors “must adopt and implement policies and procedures to ensure that they honor their agreements with all of their clients, including legacy clients of predecessor firms,” he warned.
For years, it had been a practice of advisors at Wells Fargo and predecessor firms to agree to reduce the firms’ standard, pre-set advisory fees for certain clients when they opened accounts. The advisors wrote or typed the reduced fees on standard investment advisory agreements, the SEC said.
But account processing employees at Wells Fargo and its predecessor firms failed to record the reduced advisory rates in the firms’ billing systems when setting up more than 10,000 client accounts, according to the settlement.
The overcharges went undetected because “Wells Fargo and its predecessor firms failed to adopt and implement written compliance policies and procedures reasonably designed to prevent this overbilling,” the agency said.
The firm first learned about the fee billing issues from an inquiry made by the Connecticut Department of Banking, which in April 2019 identified three accounts as potentially overcharged.
In May of that year, Wells Fargo confirmed to the department that those accounts had been overcharged and reimbursed those accounts.
But upon further investigation Wells Fargo discovered that 145 advisory accounts had been overbilled because reduced advisory fees contained in “shelf” agreements had not been entered correctly into the account setup tool. Of those 145 accounts, 124 were opened at either AG Edwards or Wachovia prior to the close of the merger between Wells Fargo and Wachovia and were acquired by Wells Fargo at the end of 2008.
“Because Wells Fargo did not conduct any review or periodic testing of the legacy AG Edwards and Wachovia advisory agreements at the time of the merger and afterwards to determine whether account opening information, including the advisory fee rates, was accurate, Wells Fargo continued to overcharge these legacy Connecticut accounts until after it began in 2019 to identify discrepancies,” the SEC said.
After it discovered and identified the overbilling in the Connecticut accounts, for which it issued reimbursement payments totaling approximately $433,622, with interest totaling approximately $268,876, the firm developed a process to review all of it5s 2.2 million advisory agreements nationwide.
“Through that process, Wells Fargo determined that an additional 10,800 accounts had also been overcharged for advisory fees nationwide as a result,” the SEC said.
“We’re pleased to resolve this matter,” Caroline Szyperski, a Wells Fargo spokesperson, said in a statement. “The process that caused this issue was corrected nearly a decade ago. And, as noted in the settlement documents, Wells Fargo Advisors conducted a thorough review of accounts and has fully reimbursed affected customers.”
Bloomberg News contributed to this story.