This week’s news has been full of cautionary tales for consumers—and particularly for investors. The Consumer Financial Protection Bureau slapped mega-bank Wells Fargo with an $185 million fine for perpetrating massive fraud on its own customers—opening up millions of unwanted accounts and credit cards.
The Wall Street Journal also has a report on a new investment vehicle known as the structured certificate of deposit, which promises higher returns but usually underperforms its more conventional brethren. While less headline-grabbing than the Wells Fargo fraud, it offers lessons applicable to many other areas of personal finance.
Here’s what you can learn from this week’s scandals and exposes.
Scandal # 1: Fraud at Wells Fargo
Salespeople at Wells Fargo—and we’re not talking a few rogue agents, but rather 5300 employees—opened up more than 2 million fake accounts in order to meet internal sales goals. Customers were completely unaware until they started racking up fees on accounts they had no idea existed.
2 million fake accounts! 5300 employees!
Honestly, it’s easy to get used to massive bank fraud. (Remember that $13 billion fine that Chase paid a few years ago? No? Neither do most people!) But we shouldn’t.
It’s especially surprising coming from Wells Fargo, who has always been known as the Big Bank That’s Not So Bad, a relative white knight among an industry known for cheats, thieves, and liars. (Sorry, banks!) They even have everybody’s favorite grandpa-cum-financial-genius, Warren Buffet, as one of their top investors. Their stock is held by a ton of brokers, including Blackrock and Vanguard, and thus is held by almost anybody who has a 401(k) or IRA.
What can you learn from this massive failure of company culture?
Keep an eye on your bank statements and credit report
Many Wells Fargo customers had no idea what was happening until they received an unasked for and unwanted credit or debit card in the mail. When Shahriar Jabbari, a Wells Fargo customer who had seven unauthorized accounts opened in his name, called the bank about these new cards, they told him just to throw them away.
If something feels off, follow up on it.
Many of the fake checking accounts were opened up with real money from customers’ other accounts—which was then returned after the fake account was closed. If you see money disappear from your account—and you can’t explain where it went—call and ask, and if you’re not happy with the answer you get, keep asking.
Also, keep an eye on your credit—if your score’s going down and you don’t know why, it’s time to investigate. Your bank probably isn’t opening up fake accounts in your name, but it’s always good to check!
What makes this case so frustrating, however, is that it’s honestly a bit hard to prevent fraud that’s committed by your own bank—the very people who are supposed to be protecting you from it. That’s why this fraud is such a big deal.
Beware of arbitration clauses in your bank’s contracts
Many of the big banks—not just Wells Fargo—put arbitration clauses into their contracts with customers, which prevents those customers from suing them over legitimate issues, or joining class-action lawsuits. Instead, any issue—even one of obvious wrongdoing like this—has to go to arbitration, which tends to be much kinder to the company than to the consumer.
That’s why this fine—split between CFPB, the LA City Attorney’s office, and the Office of the Comptroller of the Currency—is about the improper use of customer data, and not about the fraud against customers. Any individual suits brought by customers—like Mr. Jabbari—were routed to arbitration.
What are the customers getting out of this big settlement? Refunds for any fee incurred, which, according to Wells Fargo, averages out to about $25 a customer. That’s little comfort to people whose credit has been damaged by the reckless actions of Wells Fargo employees.
If something seems fishy, submit a complaint to the Consumer Financial Protection Bureau
If something’s off, and your bank blows you off, you can submit a complaint to the Consumer Financial Protection Bureau. The Wells Fargo settlements, after all, came from a lawsuit filed by the City of Los Angeles, as well as two separate federal investigations, including the CFPB.
Scandal # 2: Structured certificates of deposit, a new ripoff disguised in an old standby
In more minor (but no less annoying) news, The Wall Street Journal has a report out about a new-fangled version of that old retail bank standby: the certificate of deposit.
Known as a “structured” certificate of deposit, it promises higher returns but often delivers even less than conventional CDs, and charges a ton of up-front fees. It’s another overly complex, little understood “innovation” that mostly pads the banks’ bottom lines by taking money out of your pocket via fees.
From the WSJ story:
Mary Bailey, a 79-year-old widow in Arlington, Mass., made a big deposit for her grandchildren at her Citizens Bank branch when a financial adviser there sold her on a newfangled $100,000 certificate of deposit. It would, he said, double her savings in six years, according to a later state enforcement action.
So she was irate when her first statement showed the CD’s value had fallen to $95,712, thanks to upfront fees. “This was not a CD as I know a CD,” Ms. Bailey says.
What can we learn from this?
If you can’t understand something, don’t invest in it
Complexity is not your friend. If you can’t understand something, and the person selling it to you can’t explain it clearly, then don’t put your money into it.
This is why we’re so skeptical of whole life insurance. Maybe certain policies are great and work for certain people in certain situations.
But it’s almost impossible for a layperson to know whether a policy is good or bad just by looking at it, and it’s not in the interests of the salesperson to be upfront about a policy’s shortcomings.
Incentives rule everything
In our current low-rate environment, people are often desperate to find investments that will give them some return for their money.
In a stricter regulatory environment, banks are looking to find new sources of funding as well as new sources of revenue—often through new fees that haven’t been outlawed yet.
Banks have all the information, while consumers have very little—a classic case of asymmetrical information. This is true of these new “structured” CDs. According to WSJ, “most issuers of such CDs don’t publicly disclose any performance data, so it is difficult for would-be investors to assess how good a deal the products are.”
When considering any new financial product, you should always ask yourself “What’s the person selling me this product getting out of it?” The answer is likely a commission, especially if they’re giving you the hard sell and promising seductively high returns.
If someone’s willing to give them a hefty commission for selling it to you (especially if that commission is not disclosed), then it’s probably because they stand to make serious money from it—and from you.
This is why we recommend low-fee index funds, rather than expensive, actively managed accounts. It’s another reason we’re so skeptical of whole life insurance. There are incentives at work with these products that are often invisible to prospective buyers or investors, and which are often hidden behind obscure jargon and complex math.
And that’s true even at Wells Fargo—the customers had no way of knowing that employees were driven to open fake accounts to get bonuses or keep their jobs.
It’s not been a great week for the already damaged reputation of the banking industry. The massive fraud perpetrated by Wells Fargo is truly staggering and shows how important it is to be vigilant about unusual activity on your account. (And that even the banks with the most pristine reputations can majorly mess up.)
The report on structured certificates of deposit reminds us that incentives rule everything and that you should always be able to explain any of your investments to a relatively intelligent eighth grader. If it sounds too good to be true, it probably is.
Do you have an account with Wells Fargo? Does this settlement make you think twice about giving them your business?