SEC orders Vanguard, Empower to pay more than $25M over failures linked to advisor compensation

The Securities and Exchange Commission (SEC) has ordered Vanguard Advisers and Empower Advisory Group, along with Empower Financial Services, to pay a combined total of more than $25 million in penalties and disgorgement after finding both firms failed to adequately disclose how their advisors were compensated for enrolling clients in managed account programs.

The SEC’s actions, announced August 29, stem from parallel investigations into the firms’ compensation practices and disclosures to retail and retirement plan investors.

The orders allege both Vanguard and Empower created conflicts of interest by incentivizing their advisors to steer clients toward fee-based advisory services while failing to provide clear and consistent information about these financial incentives.

Conflicting disclosures and misleading statements

According to the SEC's order against Vanguard Advisers, which reviewed activities from August 2020 through December 2023, Vanguard’s performance review system for its managed account program, Personal Advisor Services, “considered, among other things, certain metrics that incentivized its financial advisors that serviced PAS to enroll and retain clients in PAS.”

Those quantitative metrics included implementation counts and retention rates, were factored into PAS advisors' annual performance, which helped determine their bonus or merit increase at the year's end.

However, the regulator found Vanguard’s client disclosures were inconsistent, with some documents stating that PAS advisors – who worked with investors that had eligible assets between $500,000 and $5 million – could receive bonuses for enrolling clients, while others claimed advisors received no additional compensation.

The SEC noted 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.”

Similarly, in its order against Empower Advisory Group and Empower Financial Services, the SEC found Empower’s retirement plan advisors were eligible for bonuses and merit raises based on the amount of client assets enrolled in the firm’s managed account service between July 2019 and December 2022.

According to the SEC, certain retirement plan advisors with Empower were evaluated yearly based on the amount of assets they were responsible for enrolling in the managed account service. Those individual AUM goals for managed accounts differed depending on the territories and plans they serviced.

Yet, Empower’s disclosures to plan participants did not fully explain these conflicts. Instead, the SEC said advisors routinely told clients they were “salaried and/or noncommissioned” and acting in the client’s best interest, without mentioning the financial incentives tied to managed account enrollments.

The SEC order states that “certain Retirement Plan Advisors made statements to Plan Participants concerning compensation that were rendered misleading because the Retirement Plan Advisors did not disclose that they had a financial incentive to enroll the Plan Participant in the Managed Account service.”

Regulatory findings and penalties

The SEC determined Vanguard violated Sections 206(2) and 206(4) of the Investment Advisers Act, and Rule 206(4)-7, by failing to adopt and implement written policies and procedures to prevent misleading statements about advisor compensation and to ensure full disclosure of conflicts of interest. Vanguard was ordered to pay a civil monetary penalty of $19.5 million, which will be distributed to affected clients through a fair fund.

Empower Advisory Group and Empower Financial Services were found to have violated Section 206(2) of the Advisers Act and Regulation Best Interest, respectively. The SEC ordered the Empower entities to pay a total of $5,989,969.94 in disgorgement, prejudgment interest, and penalties, with those funds also to be distributed to harmed plan participants.

Advisor comp disclosures, transparency paramount

Both firms have since taken steps to address the SEC’s concerns. Vanguard removed misleading statements from its website and updated its disclosures, while Empower eliminated the asset-based goal from advisor performance metrics and overhauled its compliance procedures. The SEC noted these remedial acts in its orders, as well as the firms' cooperation during its investigations.

A spokesperson for Empower emphasized that the SEC determined the alleged omissions around its compensation structure were negligent and not intentional in nature. No participants were found to have been harmed, and there were no issues found with any recommendations made by advisors, as well as the costs, benefits to participants, performance, or other features associated with Empower's managed accounts offering.

Empower is neither admitting nor denying the SEC’s findings.

The cases underscore the importance for RIAs and broker-dealers to ensure that all disclosures regarding advisor compensation and potential conflicts are clear, accurate, and consistent across all client communications.

Author's note: This piece has been updated with additional context provided by an Empower representative.