Sure it's pretty, but there are 22 problems.

Photographer: Al Bello/Getty Images.

Brokers Considered, Declined Request to Push Bond Funds

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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This week's fascinating Wall Street Journal article about how banks and regulators are trying to to define and measure culture ends with a discussion of Wells Fargo's "happy-to-grumpy" ratio:

The idea, executives say, is that happy employees, defined as ones who say they are satisfied, are more likely to act ethically. Wells Fargo says the ratio clocked in at 8:1 in 2014, versus 7:1 in 2013 and 3.8:1 in 2010.

Hey those are numbers, so you can measure them, and they're going up, which mean they're good. Careful though: The happy-to-grumpy ratio seems to have peaked in mid-2008, some time before the Lehman bankruptcy. As a measure of happiness, that makes perfect sense; Lehman was the Fall from which financial jollity still hasn't recovered. As a measure of ethics, though, you do have to wonder if 2008 was really the peak of good behavior in the financial industry. There are a lot of fines that say otherwise. Was Wells Fargo really twice as ethical in 2008 as it was in 2010? Isn't it at least possible that bankers are happiest when they're behaving unethically?

Anyway here is a story about some UBS brokers in Puerto Rico who were grumpy. They were grumpy because they were being asked to sell "a slew of bond funds" to their clients, and they didn't want to do that:

Their misgivings became so great that when a group of brokers was asked by the firm why they weren’t selling more of the funds’ shares they came up with a list of 22 reasons, according to people familiar with the matter. The concerns, which the brokers said were based on their own views and feedback from clients, included allegations the funds suffered from low liquidity, excessive leverage, oversupply and instability.  They were wary, in part, because many of the funds were loaded up with debt of the Puerto Rican government and related entities that was underwritten by UBS, the people said.

Emphasis added because that's the greatest thing I've ever read. I mean, one, when your boss asks "why aren't you selling more of these funds?," that's obviously a rhetorical question; the answer he's looking for is "sorry boss, we'll work harder." He's not expecting a numbered list of 22 reasons. But also, that's so many reasons. Each unhappy bond fund is unhappy in its own way, but, like, one or two or five ways. Retail bond funds are not that complicated. How can a product have 22 things wrong with it? I love these brokers so much.

The story continues as you might expect. The boss berated the rebel brokers for letting client money sit in cash without generating commissions, telling them to either "focus on the attractive benefits of our funds" or "go home, get a new job!" A senior broker chimed in that Puerto Rico's "fiscal and credit situation has gotten miraculously better," again, emphasis added for hilarity. UBS sold the funds, the funds lost value, the investors sued, and the tape recordings of that sales meeting came out.

So that's all bad, but let's look on the bright side: Those brokers nailing their 22 theses to the conference-room door are sort of heartwarming, no? They really were unhappy about selling garbage to their clients; they really did stick up for their clients against their firm. It could have been worse. There is rather a lot of precedent for salespeople selling products they don't believe in and keeping quiet about it for years, until their eventual tell-all book or whistleblower lawsuit. These brokers got out in front of the problem.

The job of a financial salesperson -- and, hi, non-fiduciary commission-based brokers are salespeople! -- is not just to sell what the firm wants her to sell; it's also to refuse to sell what the client shouldn't buy. The ideal salesperson would be an honest intermediary between firm and client, trying to treat both sides fairly and make both sides happy.  She would advocate for her firm with her client, and for her client with her firm. 

That is hard to do, as every dollar that you get out of a client goes pretty directly into your firm's revenue (and your compensation). But it is also pleasant: When your clients feel treated fairly, and don't lose money, they will be happy with you, and it is nice to be around happy people. When they lose money and yell at you and fire you, that is less nice. The tension between profits and clients is always there, and the more you pick profits over clients, the tenser you'll probably be. Conversely, the more your firm lets you be nice to your clients, and rewards you for making clients happy rather than squeezing every last dollar out of them, the less grumpy you will be.  And the fewer numbered manifestos you'll need to write.

So maybe Wells Fargo is right? Maybe a happy culture is a sign of a good culture, one where brokers aren't sent off to war against their clients every day. It's no guarantee: The euphoric 2008 happy/grumpy ratio suggests that selling bad products to clients might be great fun too, before they blow up. But it does seem to help. Bankers and brokers want to be good like everyone else; the trick is to let them.

  1. Wells Fargo seems to measure and report this (non-GAAP) measure sort of sporadically and not always consistently (sometimes it seems to be retail-only, sometimes not), so you can find various higher and lower numbers. But "At the last count, it stood at 8.5 to 1, compared to 2 to 1 for the US population," said the Financial Times in August 2008, three weeks before the Lehman filing.

  2. Read that as "what they perceived to be garbage," obviously there is (and was) a factual dispute over whether the bonds were actually garbage. No doubt each of those 22 criticisms has a response.

  3. Obviously lots of people think they should be fiduciaries. For reasons like, you know, this case.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Tobin Harshaw at tharshaw@bloomberg.net