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Wells Fargo fund business on the defensive amid sales scandal

REUTERS: When a scandal over unauthorized accounts rocked Wells Fargo Co’s retail division last fall, executives at its asset management arm sprang into action to limit its fallout at an already tough time for their business.A Reuters’ review of minutes from about two dozen state and municipal pension board meetings across the country from October to December showed Wells Fargo wealth management executives offering apologies, weighing fee cuts and emphasizing their own controls on staff hiring and vetting.Joe Ready, head of Wells Fargo’s institutional retirement plan business, for example, told trustees of the city of San Diego’s defined contribution plan that participants’ US$1 billion in assets were walled off from other parts of Wells Fargo.Last September, the bank said it reached a settlement with the authorities over findings that its branch staff opened up to 2 million unauthorized customer accounts.”Mr. Ready apologized for any inconveniences the recent incident has caused. Mr. Ready confirmed that the retirement plan accounts are not impacted by the recent events,” according to minutes of the Oct. 6 meeting published on the city’s website.San Diego pension officials declined to comment for this story. Wells Fargo declined to make Ready available and said it would not comment on its interactions with specific clients, but said in a statement:”We certainly understand the concerns about what happened in our community bank and have been in regular dialogue with our investor clients regarding the settlement,” the bank said.It is difficult to determine the scandal’s precise business impact. Like other fund managers, Wells Fargo is grappling with the seismic shift of money into funds that track indices. Even before the scandal erupted investors had been pulling money out of its funds.Yet its fund unit has seen faster outflows than its peers and the withdrawals accelerated in the last quarter of 2016.Wells Fargo’s core mutual funds business, for example, had the biggest market share decline among large U.S. fund families in 2016, according to Morningstar Inc data. In December alone, the funds recorded US$7.1 billion in net withdrawals, two and a half times more than second-worst performer.CYCLICAL UNDERPERFORMANCEAsked to comment on the data, the bank said in a statement it did not believe “there is a connection between our fund flows and the September 2016 sales practice settlement between Wells Fargo and regulators.””The recent underperformance of many active managers is simply cyclical,” it added in the statement.The bank declined to make executives available for further comment.In one case, however, the accounts debacle played a role in a lost bid for new business.The bank’s US$482 billion asset management arm was among three finalists to run a US$40 million bond portfolio for Oakland’s police and fire pension fund last fall.The contract went to a firm with 17 employees and US$1.5 billion in assets and David Sancewich, a consultant who helped the pension fund with the selection, told Reuters the scandal influenced Oakland’s choice.”It was one variable as part of the decision process,” he said in an email.In another instance, however, Wells Fargo’s assurances appeared to have had some mitigating effect. In Vermont, administrators of Champlain College who considered dropping the bank as an underwriter of a US$77 million bond because of the scandal, ultimately chose to stick with Wells Fargo following a review of the bank’s operations.When contacted, the college provided Reuters with a copy of an October memo, which said it made the decision “following a robust discussion,” while stressing that the…

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