Wells Fargo loses big client after dialing up risk in funds

After Wells Fargo & Co decided to ramp up risk in its flagship age-based retirement funds last year, one of its largest customers decided to call it quits, unhappy with the new investment strategy and how the bank handled the transition.

Wells Fargo notified investors in April 2017 that its target-date funds would become more aggressive, outlining a plan for better returns that included buying junk bonds, stocks in emerging markets and derivatives. It was a stark difference from the conservative investment strategy for which the funds were known. TexaSaver, a supplemental retirement program for nearly 240,000 state employees and elected officials, was stunned by the changes, said Georgina Bouton, assistant director of benefit contracts at the Employees Retirement System of Texas. The retirement plan had fewer than 90 days to accept the revamped product or find another investment option.

The retirement plan asked Wells Fargo for more time to find another manager, but the request was denied, she said. TexaSaver ended a decade-long relationship with Wells Fargo, pulling more than $600 million from its target-date funds.

A Colorado-based retirement plan for more than 4,000 plumbers and pipe-fitters also pulled its money from the Wells Fargo funds, citing the "unproven nature and significance" of Wells Fargo's changes, according to a notice sent to participants.

"It was a big surprise," Bouton said in an interview. "What Wells Fargo wanted to do contradicted why we picked them in the first place. I'm unhappy with the lack of professionalism at Wells Fargo and how this was conducted."

The bank says it needed to dial up risk to generate more income for investors, and recognizes that some customers are unhappy, said Fredrik Axsater, head of strategic business segments at Wells Fargo Asset Management.

"If the client is disappointed, then we are disappointed," said Axsater. "In our mind, the client is always right." Axsater said Wells Fargo is committed to the more aggressive strategy. He described the overall reception in the marketplace as "really strong."

Wells Fargo's troubles with some retirement plans were happening last year while the thirdlargest U.S. bank was trying to right itself from a scandal in its retail operation. Employees at bank branches had created up to 3.5 million phony accounts in customers' names without their permission, abuses detailed in a $190-million regulatory settlement in September 2016. Wells has since disclosed other potential issues with mortgages, auto loans and "add-on" products tacked onto accounts.

Chief Executive Officer Tim Sloan has pledged to restore trust by putting customers first. At the same time, he is trying to boost returns for shareholders by improving profits in businesses including asset management, where target date funds have been a particular sore spot.