Kristin Kalning called Wells Fargo bank with a simple issue last week — she wanted to change the mailing address on a small, decades-old IRA account. Instead, she was peppered with what she felt were overly aggressive questions about her personal financial situation, and told she couldn’t do anything with her money until she answered them. Kalning feels her money was being held hostage, and she was being held up for marketing information. The bank says it was just following regulations imposed on all brokers known as “Know Your Customer” rules.
The incident raised Kalning’s ire in part because of the cross-selling scandal that has embroiled Wells Fargo. Were the insistent operator’s questions about her other accounts part of an aggressive sales pitch? Because it was a decades-old account with only a few thousand dollars in it, the questions seemed suspicious.
The trouble started last week when she called to change the mailing address on an “ancient” IRA account that she “frankly, forgot about.” An operator proceeded to demand that she answer questions about how many dependents she had and how much money she had saved in other retirement accounts.
“I said that they didn’t need to know that. I was sternly told that I would not be able to trade or use the money in any way if I didn’t answer the question,” she said. “Why do they need to know how much money I have invested elsewhere?”
She called a second time, and was told, “The program is called ‘Know Your Customer,’ and unless I provide them answers, I cannot use my money in any way.”
When she contacted me, things were at that stalemate.
An investor rights expert I contacted told me Wells Fargo was committing a “clear violation” of regulations by restricting Kalning’s access to the account. Wells Fargo, for its part, said it was just following the rules.
Know Your Customer rules set by the Financial Industry Regulatory Authority (FINRA) mean brokers are required to keep, and update, critical details about their account holders. There are two reasons for this: first, to help prevent illegal activity; and second, to ensure that brokers don’t steer their investors the wrong way. An agent suggesting a risky stock purchase to an investor who’d recently become unemployed could be a violation these rules.
Wells Fargo said it was simply doing only what these rules require when asking Kalning about her external investments.
“We’re sorry that our client felt uncomfortable during her last interaction with the financial advisor; however, we follow FINRA Know Your Customer rule No. 2090 that essentially dictates that we must obtain a complete financial assessment before we make a suitable recommendation,” Wells Fargo spokesperson Helen Bow wrote to me. “In this instance, while our client was not asking for specific financial guidance, we are still required to ask these questions because we hadn’t spoken to her in six months or more.”
But Barbara Roper, Director of Investor Protection at the Consumer Federation of America, said Know Your Customer rules don’t “entitle the firm to prevent the customer from doing what (she) wants with the account.”
“Assuming they are in fact preventing the customer from accessing the account – I would view it as a clear violation,’ she said.
Bow stressed that this incident has nothing to do with the recent cross-selling scandal – and that the questions asked of Kalning were appropriate.
“It’s important for clients to know that their investment accounts with Wells Fargo Advisors are unaffected by the events associated with the settlement agreements involving Wells Fargo Bank. We recognize that the trust our clients place in our advisors and our company means everything; it’s the foundation of our relationship and the way we do business together,” she said. “Based on FINRA guidance, our policies require our service representatives ask these questions when we haven’t had client contact for six months or more. We believe the service representative followed the appropriate steps. “
The two-pronged “Rule 2090” Bow referenced can sound complex to the uninitiated, and is intentionally left a bit vague so financial institutions have flexibility to follow the spirit and letter of the law. A simplified explanation of the rule on FINRA’s website warns consumers that seemingly invasive questions might arise when dealing with brokers.
“FINRA’s suitability rule states that firms and their associated persons ‘must have a reasonable basis to believe’” that a transaction or investment strategy involving securities that they recommend is suitable for the customer. This reasonable belief must be based on the information obtained through the reasonable diligence of the firm or associated person to ascertain the customer’s investment profile,” it reads. “Questions should include details about an investor’s age, other investments, tax status, risk tolerance, and so on.
On the other hand, the Know Your Customer fraud-fighting part of the rules are less detailed. They require firms to have “essential facts” about account holders essentially at all times. These include personal details that are:
- required to effectively service the customer’s account,
- act in accordance with any special handling instructions for the account,
- understand the authority of each person acting on behalf of the customer, and
- comply with applicable laws, regulations, and rules
For the more detailed requirements to kick in, such as the more probing questions that Kalning objected to, there must be a “triggering event.” This page on Finra’s site makes clear what a triggering event is:
“A broker’s ‘recommendation, which is based on the facts and circumstances of a particular case, is the triggering event for application of the rule,” it says. And that makes sense. Before a broker can recommend a purchase or a sale, he or she should make a serious evaluation of that investment’s suitability, which obviously requires deep knowledge of a consumers’ situations.
It’s hard to see how Kalning’s request to change her address on an old IRA account triggered such a requirement. Is is easy to see, however, why such information would help Wells Fargo — or any broker — with marketing or cross selling.
In an attempt to clear things up, I called FINRA, but the organization said it couldn’t comment on a specific consumer’s situation. FINRA spokesman Ray Pellecchia echoed Wells Fargo’s point about firms having a “reasonable basis to believe” any recommendations are suitable for investors.
“That belief must be based on information obtained through reasonable diligence of the firm or associated person to ascertain the customer’s investment profile. The rule requires firms and associated persons to seek to obtain a number of pieces of information about the customer,” Pellacchia said. “If your reader believes the firm’s actions are inappropriate and can’t get a satisfactory resolution from the firm, the reader can contact our Investor Complaint Center and we’d be happy to look into it:.”
Pellecchia did not comment on Kalning’s assertion that she couldn’t get access to her money if she didn’t answer Wells’ questions.
Ed Mierzwinski, director at consumer advocacy group Public Interest Research Group, was happy to talk about that. With Wells Fargo already enduring public and political ire over illegal cross-selling tactics, invoking Know Your Customer rules to delve into customers’ finances shows the extent of the firm’s willingness to manipulate its account holders, he said.
“This goes to show the Wells Fargo culture,” he said. “This is almost a ransom demand. Give us this information or we won’t give you your money? They can’t do that.”
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