Ex-Broker Says Wells Fargo's Incentives Tanked His Business

Q&A September 15, 2020 at 04:17 PM

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John S. Kwit walked 600 miles and knocked on 15,000 doors prospecting for clients as an Edward Jones financial advisor. After a year and a half of such enterprise, he opted to take his business to the next level and snapped up an offer to manage money as a Wells Fargo bank advisor.

But he left the firm three years later, and now Wells is taking him to arbitration with the Financial Industry Regulatory Authority in a dispute over promissory-note bonuses, Kwit tells ThinkAdvisor in an interview.

The hearing is set for Nov. 10.

Kwit, 52, resigned from Wells in July 2017. In its January 2020 claim, citing breach of two promissory notes, Wells demands that Kwit, who worked for the firm in Naples, Florida, repay balances totaling $97,482 plus interest and costs.

In his counterclaim, Kwit, charging fraudulent inducement, dereliction of management duties and breach of contract, asks that all relief Wells demands be denied and that he be paid damages of at least $500,000 to $1.25 million.

For Wells Fargo's part, Shea Leordeanu, senior vice president of communications, said in an email: "Any time a financial advisor accepts a loan, we offer a transparent and clear contract for how that financial obligation is to be repaid. If the advisor leaves the company before fully repaying the promissory note, they must still repay the outstanding loan balance."

FINRA Dispute Resolution Services had no comment, according to a spokesperson who cited a policy of not commenting on individual arbitration cases.

In the interview, Kwit argues that his payout was cut by 75% when his contract changed at Wells and three of the four banks from which he was receiving referrals were taken from him. Money was also deducted from his paychecks to repay the promissory notes.

Kwit's monthly income plummeted from $10,000-$12,000 to $2,900.

To add to the financial strain, around this time his and his wife's elder child — they now have three, ages 6, 4 and 2 — was diagnosed with autism and required special therapy.

Moreover, Wells began pressuring him to push clients to its Private Bank, an effort Kwit tried to resist because he felt it was "selling your soul," as he explains in the interview. Kwit specializes in serving high-net-worth clients.

Leordeanu, alluding to the Private Bank, said that "for clients with highly sophisticated needs, the financial advisor may choose to bring a broader Wells Fargo team with additional services for that specific client's unique situation."

The Private Bank was so "poorly run," Kwit contends, that it was "no better than the Keystone Kops."

At the time of Kwit's difficulties, Wells was embroiled in its fake-accounts scandal, among others; consequently, his manager informed him not to count on bank referrals. The Wells brand tarnished, Kwit's external referral sources also had dried up.

Before becoming an Edward Jones FA, the LaSalle, Illinois, native was an advisor with Salomon Smith Barney from 1997 to 1999 and then a medical device sales rep. After leaving Wells, he joined Kingsview Wealth Management, three years later moving to Grace Advisory Group, where he has worked for the last year and two months.

ThinkAdvisor recently interviewed Kwit, speaking by phone from Naples. He argues that most of his challenges at Wells stemmed from "upper management and the incentives they put on their [managers] that force them to say, 'If you don't do it, we'll find someone who will.'"

THINKADVISOR: What impact would losing the arbitration have on your finances?

JOHN S. KWIT: It would force me into bankruptcy. I don't have that money. I'll lose my license and my career, which puts my wife and children in jeopardy.

What's central to your counterclaim?

Wells Fargo lied by omission. It's what they don't tell you when you're hired. It's not in [any] contract so you could see red flags.

Why did you leave the firm in July 2017?

If I hadn't left, I probably would have been foreclosing on my house in August or September. I had about $50 million in assets under management and took only about $15 million with me.

The former CFO of Wells, who was CFO of Norwest Corp. when it bought Wells Fargo Bank [in 1998], came with me as a client. He was supposed to [sign with me] at Wells that Friday, but it turned out to be the day I was leaving. So I went to talk to him.

What did you say?

"I'm not going to compromise my morals and ethics anymore." He agreed with me: "There was a reason I never kept a dime at Wells Fargo," he said. "I'm not proud of what it's become."

Based on working there, what did you learn about Wells?

The more successful you became, the more you're privy to information and the more they wanted you to do [questionable] things. It was like the curtain was slowly being pulled back to reveal the Wizard of Oz — what was going on.

Such as?

One of the first things I noticed was that whenever [a Wells Fargo customer] came in [to speak with me], they would have, like, 15 bank accounts, five checking accounts, six savings accounts.

After a year there, the reason dawned on me: Wells paid really poor salaries to the bankers, but their bonus structure was very nice. If they opened enough checking and savings accounts, and credit [lines] — cross selling — they would make a living.

Once you resigned, when did you next hear from Wells?

I got a letter [dated the same day of resignation] demanding payment of my "loan" [plus unpaid balance on a signing bonus promissory note]. I thought: "That's a good one. It was a bonus — not a loan!" Three years later here I am being taken to arbitration.

What led to this situation?

The first couple of years I was doing very well. I had four banks [that I received referrals from], and I knocked the ball out of the park. I brought in almost $200 million among the four banks. I hit the performance matrix that qualified me for a $125,000 performance bonus.

How was it structured?

They call it a bonus, but they give it to you in the form of a lump-sum loan. I didn't have the option to take it monthly. So I asked them to take out 35% interest and give me the net. But they said no — it had to be a lump sum.

What else transpired around that time?

My regional manger saturated the market with advisors because of the way his bonus was paid. So within a year, I lost three of my four banks [because of the other advisors hired to work there]. The one I was stuck with didn't have a lot of traffic — about 10 people walked in every three or four days.

Since you're not a bank employee, you can't call bank clients and ask them to come in. You need a banker to do that. But the banker [at my branch] was more involved in credit cards and checking accounts.

What happened after you were at Wells for a couple of years?

They hire you on one contract, but two years into your employment, you're operating under another contract — what they call the standard operating contract. But when they hired me, they didn't tell me about that one.

What's the difference between the two?

When you sign on, they give you a guaranteed minimum payout of 30%, unless you exceed the graduated pay scale. About 20 months later, they tell you that you'll be going on the standard contract in about four months.

What were the terms of that one?

With the second contract — which you don't sign — you have to pay for referrals from the bank: 12-1/2% off the gross subtracted from the net. Plus, you give your assistant 1-1/2%; so it ends up totaling about 43% of your pay. It didn't sound like a big deal — they dance around it. But when you do the math, that's what it comes to.

What happened when you were working under the second contract?

They started to deduct payments from my check. So about 43% is going back to the bank to pay for referrals, and they're deducting my performance bonus, too. My income went from $10,000-$12,000 a month, after taxes and insurance, to $2,900.

Were there paths to pursue to earn more?

There are ways you could work around the situation, but they put the advisor in a moral dilemma: You can push your clients to the Private Bank, which is basically selling your soul because the Private Bank is focused on raising fees and lackluster proprietary products.

How would you describe the way the Private Bank served high-net-worth clients?

The Private Bank here is no better than the Keystone Kops. They hold themselves out as a concierge service with high-level individuals, but they could never keep anybody because it was so poorly run. They were doing things down here they weren't supposed to be doing.

What was the advisor compensation working with the Private Bank?

You have to forfeit 50% of your commission for one year — then you'll get full pay. So either way they have you: If you take everybody to the Private Bank, you lose control of the client relationship and forfeit 50% of your pay; if you keep the client and manage the money yourself, you pay 43%. They wanted to charge my clients fees that were ridiculous.

Explain how the advisor loses control.

You basically forfeit the relationship because the wealth manager [at the bank] becomes the primary point of contact — and when that manager leaves, they take the client with them.

I went through three wealth managers at Wells and lost $50 million-$70 million in AUM with every manager that left. The bank wants to control the relationship even though you're the one who established it and brought the client into Wells Fargo. You become kind of a behind-the-scenes individual.

What was the firm's approach to your working with the Private Bank?

They started to push you to push the bank. I brought over quite a few $50 million clients, but what they experienced was embarrassing, to say the very least.

Why?

They were charging them 2% to manage money when, on a $6 million account, it should have been abut 1.2% or 1.3%. One client paid $75,000 just for a planning engagement, excluding documents such as a trust.

How well did these fees sit with the clients?

It was a debacle. They left Wells Fargo about a month afterward and went to Merrill Lynch. I found myself defending my clients against Wells Fargo more than anything else.

What other issues frustrated you?

On Thursdays, we'd have a conference call about Wells' wanting every client with over $2.5 million to be moved to the Private Bank so they could start charging them higher fees and get them involved in planning engagements. Then they [lowered the asset level] to $1 million.

How did you respond?

I said, "I'm not going to do that." Sometimes I'd present people but not seriously because if you didn't present clients, they'd always say, "Well, we'll find someone who will."

Did you ask your manager to help you?

Every Monday morning for about a year, I'd talk to him about how I needed help: a banker to call clients and [to have additional] banks. Waiting for people to walk in the door of [my one bank] was not the solution.

I told him: "I can't make it. You know damn well what we need in order to survive in this business: Every advisor needs three or four banks, especially in Naples because it's a seasonal community. You're messing [financially] with my family."

Was there anything else that made it hard to acquire more clients?

In 2016, when the bank scandals were going on, my boss would have monthly meetings telling us [advisors], "Don't count on the bank anymore." He said we had to count on external resources for our business, not the bank.

Did you do that?

I had two estate planners that had been referring business to me, but then they told me point blank: "You're sitting in a Wells Fargo seat. We can't refer anybody to you. If we did, they'd say, 'Thanks, but no thanks.'" So I was stuck: I had no external options, and I wasn't getting any help from the bank.

You were previously with Edward Jones. Why did you move to Wells in 2014?

I didn't go to them — a headhunter came to me. I left Edward Jones, quite frankly, because Wells Fargo presented a good opportunity. I'd proven that I was a good prospector; now I needed to become a miner. It made sense that if you want to manage money, you go where the money is.

How did Wells describe the job?

They said, "You're going to have four banks and four bankers that will refer people to you and schedule appointments for you."

How had you fared economically at Edward Jones?

I did OK. I built my AUM up to $17 million by knocking on doors in Naples, which is an 85%-gated community. I went to where the business owners were and found more success. I walked 600 miles and knocked on 15,000 doors. My phone tracked where and how long I walked.

Before becoming an advisor at Edward Jones, you were a medical device sales rep in Chicago for 12 years. What prompted the move to Florida?

I got laid off from my position. Because my wife has an autoimmune disease, it wasn't good for her to live in a cold climate. So we'd always planned to move to Florida. Since I had to get a new job anyway, we said, "Let's go!"

What happened employment-wise when you arrived?

I had a job set up, but the company lost the contract for the device they wanted me to sell. There weren't any other medical-device rep jobs available. So I had nothing.

At that juncture, you decided to be a financial advisor. Why?

I had to find something quickly. In the 1990s I was an advisor with Salomon Smith Barney for two years just to get sales experience so I could [land] my first surgical sales job — a field I was interested in. I'd had no previous sales experience.

How did you go about finding an advisor job in Florida?

Merrill Lynch, Wells Fargo and Chase weren't going to hire me because my prior experience was as a medical-devices rep. Edward Jones was the easiest company to get into.

After a year and a half, you wanted to move ahead in your career. What went through your mind when you got the Well Fargo offer?

I could either continue knocking on doors, walking the streets wearing my shoes out — keep working from 8 in the morning till 10 at night and Saturdays and not seeing my family — or I could go to the bank, where the money was.

What triggered your decision to leave Wells?

I was living off the bonus because my pay was basically cut by 75%. You try to survive as long as you can. You can do some questionable things — like pushing people to annuities and trying to pad your paycheck that way. But is it really the best thing for your client?

Basically, I refused to compromise my morals and ethics. I wasn't getting any help from the bank. The bonus money was running out. I decided I had to make a change.

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