Vanguard’s advisory division will pay over $19 million to settle Securities and Exchange Commission charges that it didn’t disclose to clients that its advisors had financial incentives to funnel them into certain managed accounts.
Separately, Empower will pay nearly $6 million to settle similar charges that its advisors didn’t adequately disclose conflicts in managed in-plan retirement accounts.
According to the Vanguard filing, the firm offers a fee-based service to retail clients called Personal Advisor Services (PAS). This service provides clients with ongoing portfolio management by Vanguard advisors and requires a minimum of $50,000 in Vanguard brokerage accounts.
The SEC found that between August 2020 and December 2023, Vanguard’s advisors used a compensation plan that financially incentivized advisors to keep clients enrolled in PAS. (Those incentives included bonuses, salary increases and promotions.)
According to the SEC, the firm’s disclosure documents differed on what they told clients about advisor compensation (and the inherent conflicts). Clients received three disclosures related to the service, including a brochure, the firm’s Form ADV Part 2B and its Form CRS.
While the brochure disclosed that some advisors could receive “a discretionary bonus” and that the firm’s performance review process creates financial incentives for advisors to recommend PAS, the Form ADV supplement and Form CRS claimed that advisors were “salaried employees who do not earn commissions or additional compensation based on the products they recommend or the amount of assets they service.”
The commission also found that Vanguard’s website made “misleading” statements about conflicts, stating that advisors had no “outside incentives” or “financial incentives to recommend certain products.”
Vanguard didn’t admit nor deny the charges, but agreed to a cease-and-desist order and a censure, and acquiesced to a civil penalty of $19.5 million. A Vanguard spokesperson said the firm “is committed to supporting everyday investors and retirement savers. We are pleased to have reached an agreement to put this matter behind us.”
Empower Agrees to Cease-And-Desist and Censure
In other regulatory news, according to the charges against Empower, the firm similarly failed to disclose conflicts to retail investors enrolled in its managed account services, which provide ongoing portfolio management of in-plan retirement accounts for a quarterly fee.
According to the commission, between July 2019 and December 2022, Empower’s retirement plan advisors (affiliated reps with Empower Financial Services and RIAs with Empower Advisory Group) were incentivized to enroll plan participants in the managed account service through bonuses and merit raises.
The SEC found that the firm didn’t disclose whether its advisors were acting as registered reps or investment advisor representatives (IARs) when recommending managed accounts to clients and didn’t adequately disclose the conflicts the compensation systems presented (some informed clients they were acting in a fiduciary manner while neglecting to disclose).
According to the commission, this left clients believing they were hearing “disinterested advice” from advisors but not understanding the financial incentives advisors might consider.
As with Vanguard, Empower didn’t admit nor deny the findings, but agreed to a cease-and-desist and censure. Additionally, Empower would pay $4.06 million in disgorgement and $426,400.14 in prejudgment interest. Empower Advisory and Empower Financial would each pay a $750,000 civil penalty, for a total of nearly $6 million.
Empower did not return requests for comment as of press time.
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