Wall Street's New Dirty Words
It was long considered a no-brainer approach for firms struggling to boost growth in a post-financial-crisis world marked by low interest rates and low tolerance for risk taking: cross-selling.
The practice suffered a severe blow last month, however, when the extent of Wells Fargo's fake-account scandal became clear and much of the blame was put on its aggressive attempt to "cross-sell" retail customers to sign up for more products.
Now, the Massachusetts Secretary of the Commonwealth William Galvin is charging Morgan Stanley Smith Barney with running an "unethical sales contest to cross-sell banking business to brokerage customers."
As a result, don't be surprised if the words "cross-selling" suddenly disappear from the banker lexicon.
What a difference a big scandal can make.
Consider what Citigroup CEO Mike Corbat said at the bank's annual shareholders meeting in April, according to the prepared remarks:
Our scale and mix of the consumer and institutional clients we serve also provide operational synergies that are significant drivers of net income. They include cross-selling opportunities, tighter risk management, sharing of technology and operational platforms, lower costs of balance sheet funding and many procurement efficiencies. In fact, we estimate the impact of these operational efficiencies to range from $8 to $12 billion annually.
And that's not to single Citigroup out: Most big banks have in one way or another sung the praise of cross-selling.
For JPMorgan Chase, cross-selling and synergies between business units were reportedly worth $14 billion in 2012. And, in the words last year of Bank of America's then-CFO Bruce Thompson: "We're seeing a great deal more of that cross-selling which is obviously a great thing."
Wells Fargo and Morgan Stanley aren't the first to run into problems with this type of thing. JPMorgan last year agreed to pay more than $300 million to settle allegations it failed to tell customers that the bank earned profits by putting their money into mutual funds and hedge funds that generated fees for the company.
Morgan Stanley's case, coming right on the heels of the Wells Fargo soap opera, is bound to focus more scrutiny on the practice, even if what the firm is being accused of doing is nowhere near as scandalous.
Galvin, in an administrative complaint filed Monday, alleged that sales contests in his state and Rhode Island to sell loans backed by securities held in clients' accounts created a conflict of interest which violated the firm’s fiduciary duties. The firm allegedly downplayed the risks of the loans, such as the possibility that Morgan Stanley may liquidate clients' positions without notification under certain circumstances.
(Morgan Stanley objects to the accusations and plans to defend itself vigorously, arguing that the loans were opened with clients' consent and offered them low-cost liquidity, according to the Bloomberg News story on the case.)
Still, the action underscores that it has become more and more hazardous to try to milk all possible dollars out of existing customers, even if millions of fake accounts are not part of the story.
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