Wells Fargo Pays $40 Million to Customers for Excessive Fees

For years, Wells Fargo overcharged customers for investment advice. While Wells Fargo admitted no wrongdoing, it recently repaid $40 million to nearly 11,000 clients who had been over-billed. In addition, Wells Fargo paid a $35 million civil penalty to the Securities and Exchange Commission (SEC).

Excessive fees

According to the SEC, each of the affected accounts was opened prior to 2014, and account holders continued to pay excessive fees through December 2022. In total, investors paid more than $26.8 million in excessive fees and interest.

At least part of the problem stems from practices carried out by legacy firms AG Edwards and Wachovia. AG Edwards and Wachovia merged in 2007, while Wells Fargo and Wachovia merged in 2008.

In a written statement, Gurbir Grewal, director of the SEC's enforcement division, wrote, "For years, Wells Fargo and its predecessor firms negotiated reduced advisory fees with thousands of clients, but failed to honor them."

The SEC contends that, in some cases, Wells Fargo's internal systems failed to account for the reduced fees. At a minimum, fees continued to accumulate for nine years.

Impact of fees

Investment fees are like termites, slowly nibbling away at your portfolio. The problem is that many investors don't think of 1% to 2% as too much to pay professionals to manage their portfolios. While it may not seem like much, fees add up. Worse yet, they compound as your investment returns compound. You don't just lose the amount you pay in fees; you also lose the growth that money may have enjoyed for years to come.

Let's say you have $50,000 invested, and your investment earns an average annual return of 7% for the next 25 years.

In this case, paying 2% in ongoing annual fees means leaving over $102,000 on the table.

How to know what you're being charged

To understand how you're charged, it helps to understand the different types of fees. Typically, there are two -- ongoing fees and transaction fees. Ongoing fees are charged regularly, such as an annual account maintenance fee. Transaction fees are charged each time you make a transaction. For example, if you buy a mutual fund, you'll pay a one-time fee.

The simplest way to learn the type of fee you'll be charged and how much you can expect to pay is by reading the material provided by your brokerage. Look at the opening documents, account statements, confirmation, and any product-specific documents to find both the type and the amount of fees. Naturally, you know that an ongoing fee of 2% will eat into your investment more than a fee of 0.25%.

Important questions

According to the SEC, these are some of the questions you should ask a financial professional before committing to an investment:

• How do these fees and expenses compare to other products that can help me meet my financial objectives?
• How much will this investment have to increase in value before I break even?
• How do you get paid? If it's by commission, how are your commissions determined? (This question will give you a better idea of whether you're being pushed in a particular direction to make more money for the advisor).
• What are all the fees relating to this account? Can you provide a fee schedule that lists all the fees that I will be charged for investments and maintenance?
• What fees will I pay to purchase, hold, and sell this investment?
• Will fees appear clearly on my account statement or my confirmation? If not, how will I know about them?
• How can I reduce or eliminate some of the fees I'll pay? For example, can I buy the investment directly without a financial professional?
• Do I need to maintain a minimum account balance to avoid fees?

Yes, it seems like a lot, but when you consider how much money you can lose to fees, asking these questions is worth your time.

Check your statements

If the Wells Fargo situation teaches us anything, it's that we should check our statements to ensure that we're not being overcharged for fees. It's up to you to check your statements and to raise an alarm if you are being overcharged.

Just as you would shop around for any other product or service, shop around before you invest.