October 24, 2016
What We’re Reading This Week
Alright so apparently this is the scandal that won’t die. My issues with reading about this week after week is that the whole thing is dumb. It was dumb for the employees, it was dumb for the customers, it was dumb for the bank. Dumb, dumb, dumb. Now there is “Voices from Wells Fargo”. The New York Times published a series of excerpts from interviews with employees. Apparently the trauma manifested itself in some pretty odd ways. The whole piece left my jaw on the floor, so let’s cover my favorite parts! “A number of (employees) had a stark choice: Create new accounts by any means possible, or risk being fired for falling short of their sales goals. Ok, any means necessary does sound pretty dire, but why isn’t anyone talking about the fact that one way of creating new accounts is.. go do your job? Committing fraud is a choice! So is working hard and doing your best. Is putting effort in so distasteful that it’s more palatable to steal people’s identities? Before anyone suggests that I don’t know how I would act if I were in a similar situation, please remember, I worked at Chase in retail banking for 5 years. I know exactly what they went through. I saw colleagues turn to lying and cheating to meet sales quotas and it always stemmed from laziness, not impossible expectations. Besides, there are worse things than being fired. In China they might shave you and spank you. Or this might happen: “In late November 2012, I was completely addicted to hand sanitizer and drinking at least a bottle a day during my workday.” Wait, wait, wait, go back. “I started to have extreme physical stress-related symptoms as well as random panic attacks.” Ok, I’m with you so far. “One morning, before meeting with a customer, in which I knew I was going to have to sell unwanted services, I had a severe panic attack.” Okay…”I went to the bathroom and took a drink of some hand sanitizer.” Stop. I know what stress feels like, especially when you have to meet sales goals. Before working at Gainplan I never worked in a role that didn’t have a heavy commission structure. I also never drank hand sanitizer. In fact, I’ve never had a problem, apart from dirty hands, that I thought I could solve with hand sanitizer. Is that a thing? I sort of feel like this woman just wanted to drink hand sanitizer and needed an excuse. Ok, let’s move on. “Every morning I had to sit with my boss and go over the previous day and every single customer’s relationship. I had to tell them why I didn’t force them into opening a third, fourth, fifth checking account that they could have used for Christmas, their son’s birthday, school, a pet and so on.” No, don’t stop! What kind of account do you need after you open pet account?! Geez, just once I would like someone at the bank to tell me I need an account for a pet. I would go into a bank for that! I really want to know more, is this an account for my pets to use? Is an account to save for a new pet? Should I tell my other pets that I am saving up for a better pet? If I don’t tell them, won’t they figure it out when they check their balances online? There’s more but I am starting to feel a little guilty. It’s not that I take pleasure in other people’s pain, I just don’t feel like the employees are the victims everyone makes them out to be. People are always responsible for their actions, even during an economic slowdown when it’s hard to find another job. The bottom line is that this is a culture and management issue. Also, let’s hope this thing is over; I don’t want to write about this anymore.
I wrote about the Department of Labor’s Fiduciary Standard back in April and Jeff has written about it a couple times; here, and here. And we never mentioned Dred Scott. But Anthony Scaramucci, the managing partner of Skybridge Capital did. For the uninitiated, allow me to initiate. Dred Scott was the Supreme Court’s decision in 1957 to deny a slave his freedom because African-Americans could not be citizens. That’s not really…a great analogy? That’s right, he believes that the United States forcing advisors to act in their client’s best interest is just like when the United States decided that African-Americans couldn’t be citizens! It’s a pretty wild correlation to draw but if you sort of ignore almost everything wrong with that concept you can get to his point: The Department of Labor’s Fiduciary Standard is discriminatory. To whom you ask? To middle-class Americans. The premise of this argument is rooted in the concept that if advisors can’t charge people outrageous commissions then they can’t be financial advisors any more. Put differently, these advisors would only work with the very wealthy. Put even more differently, bad advice is better than no advice! I wonder if the investors would agree with that? Let’s extrapolate that concept to other careers and see how terrible it sounds. Fun, right? Would you…rather have a bad dentist or no dentist? A bad doctor or no doctor? A bad mechanic or no mechanic? I guess they may be a group of people that would think, hey, maybe the bad mechanic will get lucky? This is analogous to the concept that a broken clock is right twice a day. Then again, I am the sort of person that works on their own car. People at the auto parts store hate me because I will come in and place a piece of my car on the counter and say, “I need a new one of theses.” They will then try, for 10 minutes, to convince me that if I don’t know what it’s called I shouldn’t be working on it. However, I still pay a professional to manage my money, it’s that important. So if we move on from “bad advice is better than no advice” we can address whether these people are getting any advice now. Having worked with thousands of families over the years I can say that the answer is no. Under a suitability standard advisors are not obligated to give advice, just to sell a product. So…this whole theory really goes out the window. Additionally, other solutions can be developed. For people that don’t have a lot of money to invest, the advice is pretty straight forward. There are lots of services, Vanguard tends to be leading the pack, that offer relatively low cost advice for people with limited resources. Alternatively, larger firms could be required to take on pro bono work, the government could subsidize planning for clients, there are lots of different ways this could play out. In the short term, I’m guessing the office will be a little more awkward for any African-Americans that work at Skybridge.
Speaking of fiduciary and suitability, the crux of the problem lies in the gap between reality and expectation. You see, people expect salespeople to lie to them, they don’t expect fiduciaries to do it. The issue in financial services right now is that there is very little guidance for investors on how to spot a salesperson and how to spot a fiduciary. When people are talking about money and investments they sort of expect that the person they are dealing with is a highly trained, competent professional. That’s just not the case, and the powers that be are extremely hesitant to step in and help. A few degrees away from that concept is the recent case of Texas Attorney General Ken Paxton. Ken was awarded $840,000 in stock in July, 2011 for his efforts in selling said stock to his friends, coworkers, investment club members, and pets of Wells Fargo customers (I made the last part up). The SEC brought charges of fraud against Ken because his compensation was part of an agreement he had with the company, an agreement to receive 10% commission on all stock purchases he orchestrated. Ken did not tell people that bought the stock from him and they probably would have wanted to know that. Hence, it was deemed a “material” fact. I think his friends should have figured it out because he would jump up and down and shout “yippee” every time someone agreed to buy the stock but, unfortunately, that part was in my imagination. This is where reality starts to veer away from expectation. Mr. Paxton took the case to the Federal Court and the it was dismissed because the judge ruled Mr. Paxton may have had a moral duty to disclose such information but not a legal duty. It turns out it is not illegal for a friend to recommend you buy a stock and not tell you about their compensation, it’s just rude. It does turn out though, that when you sell a security in a given state you are supposed to register to sell securities in that state. Ken didn’t do that and that particular conviction will stick so I guess there is sort of a silver lining.
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