Vanguard, Empower to Pay $25M Over Failures Tied to Advisor Compensation

According to the SEC's order, from August 2020 through December 2023 Vanguard's performance review system considered, among other things, certain metrics that incentivized its financial advisors that serviced the program to enroll and retain clients there.

Vanguard "failed to adequately disclose the conflict of interest that this incentive compensation system presented because certain disclosures contained contradictory statements about PAS Advisors’ receipt of incentive compensation," the order states.

The asset manager said in a statement shared with ThinkAdvisor on Friday that Vanguard is "committed to supporting everyday investors and retirement savers. We are pleased to have reached an agreement to put this matter behind us."

Empower Disclosure, Reg BI Failures

The SEC action against Empower Financial Services states that the firm "did not provide full and fair written disclosure of the capacity in which Retirement Plan Advisors were acting when providing advice or a recommendation that a Plan Participant enroll" in the managed account service.

"Rather than specifically disclosing to Plan Participants whether they were acting in the capacity of either a registered representative or an investment adviser representative, Retirement Plan Advisors disclosed to Plan Participants that they were dually licensed and placed the burden on Plan Participants to clarify the capacity," the SEC order states.

Empower also failed to adequately disclose "the conflicts of interest that the incentive compensation system presented" for certain Retirement Plan Advisors.

The omission, according to the SEC, rendered misleading certain Retirement Plan Advisor statements to plan participants regarding the advisors’ role "in discussing or recommending enrollment in the Managed Account service," including statements made by certain Retirement Plan Advisors that they were salaried and/or noncommissioned.

Empower Financial Services’ Regulation Best Interest disclosure and Form CRS did not satisfy Reg BI’s Disclosure Obligation "because they did not provide full and fair disclosure of the conflict of interest presented by certain Retirement Plan Advisors who had a Managed Account AUM Goal and the impact that goal had on their compensation," the order states.

Empower Financial Services’ disclosure that it “may consider” a Retirement Plan Advisor’s success in “gathering, retaining and consolidating client assets” when determining the Retirement Plan Advisor’s variable bonus was misleading, the order states.

According to Empower, “The SEC did not find that any participants were harmed as a result of these matters.” The regulator also “did not take issue with any of the actual recommendations made by the advisors, or with any of the costs, benefits to participants, performance, or other features associated with Empower’s managed accounts offerings," it noted in a statement.

“The SEC acknowledged Empower’s significant remediation efforts and substantial cooperation with the SEC staff during the investigation,” Empower said. “All of the issues identified by the SEC have been fully remediated.”

Vanguard's PAS Program

According to the SEC order, clients that enroll in Vanguard's Personal Advisor Services receive investment advice and ongoing portfolio management by PAS Advisors, who are investment advisor representatives. Clients pay an annual advisory fee, which is assessed quarterly and starts at 0.30% of assets under management and decreases as assets cross certain thresholds.

Before enrolling in the program, prospective clients typically scheduled an initial consultation to discuss the service and their eligibility to enroll, which required a prospect to have a minimum of $50,000 in assets in eligible Vanguard brokerage accounts, the order states.

Based on the amount of assets held, the order states, the prospective client would have consulted with a PAS Advisor in one of two sectors:

Those with eligible assets between $50,000 and $499,999 would speak to an advisor in Mass Affluent, now known as Vanguard Personal Advisor; and those with eligible assets between $500,000 and $5 million would speak to an advisor in High Net Worth, now known as Vanguard Personal Advisor Select.

"PAS Advisors serving High Net Worth clients were eligible for a bonus, while PAS Advisors serving Mass Affluent clients were only eligible to receive merit raises unless and until they were promoted to a bonus-eligible position," the order states.

While Vanguard's Form ADV Part 2 Brochure for the program disclosed that some PAS Advisors "were eligible for a discretionary bonus and that the performance review process created a financial incentive for PAS Advisors to recommend PAS over other advisory programs and brokerage services offered by Vanguard and its affiliates, both the firm’s Form CRS and Supplement to the PAS Brochure contained contradictory disclosures that PAS Advisors received no additional compensation," the order states.

Marketing Materials, Form CRS

The SEC's order also states that Vanguard made misleading statements in marketing materials regarding PAS Advisors’ conflicts of interest, including that PAS Advisors received no outside compensation or financial incentives.

During the relevant period, Vanguard's website "described PAS Advisors as salaried advisors that do not work on commissions and 'have no financial incentives to recommend certain products,'" and that PAS Advisors "had 'no outside incentives, so they’ll always put your interests first.'”

These statements "were misleading because PAS Advisors were incentivized through their performance reviews’ potential impact on compensation and, in some cases, promotions, to recommend that clients enroll and remain in PAS."

These statements regarding financial incentives were removed from the website in 2023.

Vanguard also had three sets of client disclosures related to the program, which were provided to prospective clients as a package before their initial consultation — the PAS Brochure; a Form ADV Part 2B, also known as a Supplement to the PAS Brochure; and an Advisor Client Relationship Summary, or Form CRS.

Although Vanguard's PAS Brochure "disclosed that some PAS Advisors were eligible for a discretionary bonus and that the performance review process created a financial incentive for PAS Advisors to recommend PAS," the order states, Vanguard's "Supplement and Form CRS contained statements regarding PAS Advisors’ compensation that contradicted the PAS Brochure."

"Therefore these disclosures failed to adequately disclose the conflicts of interest resulting from Vanguard Advisers’ incentive compensation structure," the SEC said.