Exclusive: Wells Fargo cuts approved list of money managers

Wells Fargo & Co is slashing an approved list of money managers and investment vehicles that its stockbrokers market to the firm's wealthy clients, a change of direction that has rattled the third-largest U.S. brokerage network.

Executives said the clampdown protects clients from exposure to a plethora of investment models that have received little oversight. It will also reduce the firm's risk at a time when litigation and compliance costs are rising industry wide.

Money managers affected by the cull range from big names such as JP Morgan Asset Management Inc and Legg Mason to scores of small hedge funds and regional managers. For Legg Mason alone, the number of investment products on the list will shrink to 12 from 56, according to documents reviewed by Reuters.

Many of the smaller managers have worked with Wells' advisers for years, sometimes as former colleagues in the brokerage business.

"We want reassurance that the strategies being recommended to our clients...are something we are comfortable with," said Patricia Loepker, director of externally managed and institutional accounts at Wells Fargo Advisors, the company's brokerage unit.

"Our clients, of course, think they're good strategies because otherwise we wouldn't offer them, but it was time for us to deliver on that belief," she said.

Currently the approved list has more than 1,000 investment strategies from about 470 portfolio managers. Starting next month, brokers will no longer be allowed to solicit money for 633 of the strategies offered by 220 of the outside managers, according to documents reviewed by Reuters.

The extensive list in part reflects Wells Fargo's December 2008 acquisition of Wachovia Corp. Wachovia's broker-dealer was an amalgam of more than a dozen smaller firms - including A.G. Edwards, Prudential Securities and Everen Securities - and brokers at the firms who had ties to many little-known portfolio managers.

With 15,354 brokers, Wells Fargo Advisors at the end of 2012 held $58 billion of client assets managed by outside portfolio managers in what are known as separately managed accounts. That ranked Wells fifth among all brokerage firms, according to Cerulli Associates, a consulting firm. Measured by its total managed account assets of $325 billion at the end of this year's first quarter as well as by its financial adviser count, Wells Fargo is the third-largest broker in the United States.


The changes at Wells are centered on its Private Advisor Network, a product in which clients are directed to outside money managers by their financial advisers - as Wells designates its brokers - and pay fees to both the bank and the outside managers.

The culling has irritated some of the brokers. Four interviewed by Reuters complained that the changes were unveiled only a few weeks before they are to take effect next month.

The brokers, who sought anonymity because they are not authorized to speak to reporters, said Wells is eliminating unique investment choices that clients cannot find at rivals - including unheralded managers with strong records.

"They say they are trying to protect my interests but they are shutting down new business in these accounts...," said a 30-year veteran who produces about $1.4 million of brokerage revenue a year.

The advisers also accused Wells of hardball compensation tactics to discourage them from using Network, which they said is more lucrative to many brokers than some other managed money products in which the bank keeps more of the fee.

Earlier this year, Wells imposed a surcharge on fees advisers glean from Private Advisor Network accounts. The levy, which some advisers said was buried in the company's 2013 compensation plan, raised protests from high-producing brokers who said they could lose hundreds of thousands of dollars.

Wells backed off by putting a $10,000 annual cap on the charge. It also told portfolio managers it may consider reinstating some investment strategies after a year if there is enough interest from advisers and a "need within the asset class."

Wells acknowledges some of the broker discontent but insists it has little choice because of its inability to adequately monitor the qualifications and track records of so many outside managers.

"Advisers are very entrepreneurial and independent and they like to demonstrate their independence with a broad range of managers," said David Carroll, head of Wells' wealth, brokerage and retirement division. "The problem is that we can't keep up."


Under the new policy, clients can opt to remain in investment strategies being lopped from the approved list, but new money is subject to a $2 million minimum and can be invested in a non-approved strategy only at the client's request. The current Wells minimum is $100,000, though some outside managers have higher requirements.

If clients pull their money, advisers could lose additional compensation cut since they are paid on total assets invested in the separately managed account program.

Outside managers, meanwhile, worry about the timetable. In October, the bank will alert clients that it has stopped doing due diligence on products that have fallen off the list, according to internal documents reviewed by Reuters.

"If a heavy-handed letter goes out telling clients to use the strategies at their own risk, we'd be concerned," said John Ranft, a salesman and former sales director at Navallier & Associates, a Las Vegas portfolio manager that is losing 17 strategies and keeping six in Network.

Wells Fargo is now negotiating with some managers on the Private Advisor Network's approved list to also list the strategies on a second platform called Masters, Wells' Loepker said.

That program, which offers what are known as wrap-fee accounts in which clients pay a single fee for management and administrative services, currently has about 80 managers offering about 185 strategies. Within two-and-a-half years Wells expects it to have about 125 managers with 500 strategies, Loepker said.

Clients whose outside managers move to Masters would pay lower fees than in Network and, in some cases, be subject to lower account minimums, she said.

A Wells spokeswoman declined to comment on some advisers' contention that the bank makes more money from the wrap-fee than from the separately managed account.

Several outside managers said the winnowing of Wells' approved list brings the firm in line with its rivals, leading to a greater homogenization of investment choices for investors. They declined to be identified, since many are hoping to requalify strategies for Wells approved list and its wide reach among retail investors.

Still, portfolio managers said they were taken aback by the shift at Wells and how it might affect the firm's reputation as being open than rivals to smaller managers recommended by its advisers.

"Wells had a very liberal strategy," said Navallier's Ranft. "If one strategy was approved, you could basically get any others added to the list."

(Reporting By Jed Horowitz. Editing by Lauren Young, Frank McGurty, Leslie Gevirtz and Diane Craft)