Recently, Wells Fargo Advisors Clearing Services and Wells Fargo Financial Network agreed to pay $35M to settle US Securities and Exchange Commission (SEC) claims. These claims blame both of these Wells Fargo entities recommended their clientele (mainly retirees, but includes other brokerage customers) certain complex non-traditional ETFs. It also puts blame on their RIAs (registered investment advisors) for having lax supervision of the transactions.
Because of these recommendations, customers purchased these non-traditional ETFs pushed by Wells Fargo RIAs, and were unprepared for the true risk that were brought upon them. Thanks to that, many customers lost up to millions of dollars! Read more at: FINRA Cracks Down Non-Traditional ETFs.
The Inverse Exchange Traded Funds (Inverse ETFs)
An inverse ETF is a bet against the market. This is a short-term investment, as typically, even with dips, the market will eventually rise again, causing any gains made to quickly turn into losses. Holding on to an inverse ETF for longer than a day is a bad idea. And when not handled properly, by a consummate professional, inverse ETFs can lead to huge losses. Despite this being something every broker and financial advisor should know, Wells Fargo’s advisors recommended that certain clients hold onto inverse ETFs for months or even years. Some customers were suggested to invest in them when setting up their retirement accounts!
The Complex Risks of Non-Traditional ETFs
Non-traditional ETFs are not something the average investor should get into. Even I dislike using them. But it’s an even worse idea for those who can’t take too much risk, or have limited income. Retirees fit both of those demographics quite well. But the SEC’s case against Wells Fargo claims that between April 2012 and September 2019 recommended single inverse ETFs to their retail customers, many of which are senior investors. Wells Fargo took advantage of their inexperienced customers, when they should have known better that many of them couldn’t take on the risk these ETFs posed, even if they were aware of them (which is unlikely).
Lax Supervision and Inadequate Training Over Inverse ETFs
During the period mentioned earlier, the SEC claims that Wells Fargo Advisors Clearing Services and Wells Fargo Financial Network didn’t have the correct policies and procedures for correctly complying when dealing with inverse ETFs, and that advisors did not have the correct training or supervision. Due to this problem the Securities and Exchange Commission said that the non-traditional ETF recommendations to customers were unsuitably suggested by brokers and investment advisors. And this is not the first time this has happened to Wells Fargo. Before this in 2012, Wells Fargo and FINRA (Financial Industry Regulatory Authority) settled out of court for $2.7 million, saying that something similar to this case happened. The SEC disputes the claim that Wells Fargo changed their policies and procedures when dealing with inverse ETFs. Due to the nature of this current settlement, Wells Fargo neither admits nor denies any wrongdoing on their part. But over the fact that they went to settle in the first place, and that they say they will no longer work with single inverse ETFs, it’s safe to say that Wells Fargo feels partially responsible for this.
Brokerage Firm Negligence
Unnecessarily exposing customers to high risk (especially when the investors want to invest conservatively), unsuitable recommendations, inadequate supervision, and recommending complex investments to retail investors are all perfectly valid grounds for investment fraud, especially if said investments cause a loss. When this happens, do not hesitate to contact a law firm that deals directly with negligent and fraudulent actions on behalf of brokers and financial advisors.
John has a background in helping kids with math and loves writing about the stock market. He has a brain for things that are technical and is applying them in the financial world. Follow John as he covers breaking investment news and stock tips.