Why Do Incentives Matter In The World of Financial Services?
You might want to add another question to ask that well-dressed salesperson who is selling you a financial product (or any other product for that matter):
How are you being compensated?
I bring this up as the clouds continue to darken over a certain financial institution who has been in the headlines recently:
- Wells Fargo opened a couple million false accounts (Bloomberg)
- Wells Fargo fired 5,300 workers for improper sales push. The executive in charge is retiring with $125 million. (Chicago Tribune)
- Wells Fargo fined $185 million for fraudulently opening accounts (NY Times)
Here’s a brief summary of what happened (from NY Times):
For years, Wells Fargo employees secretly issued credit cards without a customer’s consent. They created fake email accounts to sign up customers for online banking services. They set up sham accounts that customers learned about only after they started accumulating fees…In all, Wells Fargo employees opened roughly 1.5 million bank accounts and applied for 565,000 credit cards that may not have been authorized by customers, the regulators said in a news conference. The bank has 40 million retail customers.
Why would the WF employees set up sham accounts that might have been opened for one day and then closed with the customer none the wiser? Expect to hear this defense from these fired employees: The incentives made me do it. You see, WF had a compensation plan that encouraged retail bankers to sell more products (like new bank accounts and credit cards). If that meant creating these new accounts out of thin air when they couldn’t hit their targets, well you gotta do what you gotta do to keep your paycheck. Again, think of the magnitude of this…5,300 employees and a few million accounts.
More on the sales culture at the bank (from NY Times):
Wells Fargo is famous for its culture of cross-selling products to customers — routinely asking, say, a checking account holder if she would like to take out a credit card. Regulators said the bank’s employees had been motivated to open the unauthorized accounts by compensation policies that rewarded them for opening new accounts; many current and former Wells employees told regulators they had felt extreme pressure to open as many accounts as possible.
Why is this incentive issue so critical? Consumers need to know that the smooth-talking, well-dressed salesperson has a set of incentives that are often not aligned to their own. You better do your own research and not rely on someone whose commission relies on you saying “Yes.”
I suspect that this one will be in the news for a while given a confluence of factors:
- Feeds into the popular narrative of unscrupulous, fee-hungry banks
- Banking system relies on trust and this was clearly a violation of it
- Magnitude of the issue (see above)
- Another example of consumers wondering who’s looking out for their interests (regulators, senior executives, etc.)
- Executive pay issues where executive in charge of this area left with retirement package
- Journalists will dig in on this issue to see how prevalent this might be at other banks
- Election year so hearings are a given
- 5 minutes ago this headline from WSJ: Federal Prosecutors Investigating Wells Fargo Over Sales Tactics
How to use this current event in the classroom?
- Mini-activity for students to research the following:
- Identify the title for the person who sells these products listed below
- Research the typical pay practices for the person selling that product
- Financial products:
- Financial advice from financial advisor
- New/used car
- Car loan
- Auto insurance
- Mutual funds/stocks
- Checking account
- Credit card
- Credit score
- Tax preparation
- Life insurance
- Debt settlement
- Federal student loans
Here’s an earlier post from last year when the case first came to light and also discusses the importance of incentives.
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.
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