The Finger-Pointing at the Finance Firm TIAA – The New York Times

TIAA’s image as a benevolent provider of investment advice is in question. Several legal filings — including a lawsuit by TIAA employees with money under the company’s management, and a whistle-blower complaint by a group of former workers — say it pushes customers into products that do not add value and may not be suitable but that generate higher fees. Such practices would violate the legal standard that applies to retirement accounts and securities laws governing investment advisers.

And while TIAA contends that its operations are untainted by conflicts because its 855 financial advisers and consultants do not receive sales commissions, former employees, in interviews and in lawsuits, disagree. They say the company rewards its sales personnel with bonuses when they steer customers into more expensive in-house products and services.

In the New York Times, Gretchen Morgenson continues by describing a confidential whistleblower complaint that:

contends that TIAA began conducting a fraudulent scheme in 2011 to convert “unsuspecting retirement plan clients from low-fee, self-managed accounts to TIAA-CREF-managed accounts” that were more costly. Advisers were pushed to sell proprietary mutual funds to clients as well, the complaint says. The more complex a product, the more an employee earned selling it.

Tim Smith on Conflicts and Opportunities in Mutual Fund Proxy Votes: Progress at Vanguard

VEA Vice Chair Nell Minow interviewed Walden’s Tim Smith for the Huffington Post:

I’ve written earlier pieces about the failure of the people who manage our money, especially our retirement savings to provide essential feedback to the companies whose stock they buy on behalf of more than 40 percent of working Americans, charging us as many as 16 undisclosed fees and usually voting against shareholder initiatives on improving board, increasing the link between CEO pay and performance, and making better disclosures on climate change, cybersecurity, diversity, and other issues relating to investment risk and corporate reputation. There’s been a little bit of progress at Vanguard, one of the most powerful and influential money managers, with more than three TRILLION dollars invested, so I asked one of the most thoughtful leaders in this field, Tim Smith of Walden Asset Management, some questions about why that is important and what it means.

 

How much stock in big American companies is controlled by these firms?  How much money is involved?

These are massive investment firms. BlackRock has over $5 trillion dollars in Assets they are managing and Vanguard approximately $3.5 trillion. The raw size of their holdings results in having tremendous power with the companies they own. Most firms that have outreach to their primary investors always make sure to arrange visits with Vanguard and BlackRock as a necessary stop.

 

Why does it matter how they vote on topics like climate change and disclosure of political contributions when even a 100 percent vote is advisory only and does not require the company do  anything?

 

Shareholder resolutions filed on social and environmental issues have a 45 year history as investors raise important environmental , employee relations, human rights, workplace health and safety issues among others. These resolutions and the engagements that accompany them have had a significant long-term impact on company policies and practices. There are literally hundreds and hundreds of examples of companies responding positively to investor input by

* expanding their corporate disclosure for investors and the public

* changing their policies, practices, and behavior

* updating governance policy

*taking forward-looking steps on an issue like climate change

*making sure hazardous products are removed from food or a production process influencing workers.

*adding diverse candidates to the Board

And the list goes on. Whether a shareholder resolution is binding or not seems immaterial . Companies often see these issues as affecting their reputation and their credibility with investors or consumers as well as affecting them financially over time. Thus many companies take action stimulated by the case being made by investors — but also by their own sense of how acting in a responsible way is good for their business and long term shareholder value.

 

So how investors vote is vitally important because it is a clear indicator of how a company’s shareowners feel about an issue. To blindly vote for management in virtually all cases not only distances the investor from important decisions that affect them financially but is far from acting as a “responsible fiduciary.” In short, it definitely matters how they vote your shares!

 

Every mutual fund company files a form NPX each August disclosing how they vote. So there is a public record. In addition Ceres, the environmental organization, summarizes how funds vote on climate related issues, a good indicator of an investment firm’s voting stance. You can see which funds vote for climate resolutions 0 percent of the time or 15 percent or over 50 percent.

 

What have you been doing to try to get Vanguard and Blackrock to be more transparent and engaged in share ownership rights like proxy voting?

 

Over the last several years companies like BlackRock and Vanguard which had a consistent record of voting against all social and environmental resolutions faced growing pressure from clients and investors. In addition, media attention compared them unfavorably to companies like State Street which showed real forward progress in proxy voting. In addition, PRI expects its members to demonstrate seriousness in being an “active owner.”

 

Walden Asset Management, where I serve as Director of ESG Shareowner Engagement, led a shareholder resolution to both companies and was joined by other investors  as cofilers. This prompted both companies to sit down with us to see if we could come to an agreement allowing the resolution to be withdrawn before the vote. As I said, even non-binding shareholder proposals can have an impact.

 

Both discussions were productive, leading to agreements, and both companies disclosed their new thinking about proxy voting on their websites, highlighting their deep concern about climate risk and their strong support for diversity on boards of directors.

 

What does this latest statement from Vanguard signify?  Does it go far enough?

 

These are important steps forward by two of the world’s largest investment managers. Their engagements with companies send a strong message to executives that it is necessary to address and urgently  act on climate change, for example. But their voting record is still at the bottom of the ladder. They voted for two resolutions, at ExxonMobil(62.3 percent shareholder support) and Occidental (67 percent shareholder support) but they voted no on dozens of other climate-related resolutions. It’s a start but still demonstrates a very modest voting record. Pressure will doubtlessly mount on these two giants to match their rhetoric with actual votes pressing companies to move with some sense of urgency on key environmental and social issues.

 

What more would you like money management firms like Vanguard and Blackrock to do?

 

Vote more aggressively, be transparent about what is put on the table in their meetings with companies (no need to mention companies by name), join other investors in speaking out on key environmental/social/governance issues affecting companies financially, meet with shareholder resolution proponents to better understand their positions, speak publicly about the value of the shareholder resolution process, and make sure will not be eradicated by proposals by led by the Business RoundTable or Chamber of Commerce.

SEC should follow the Labor Department’s fiduciary standard – MarketWatch

[F]or [SEC Chairman Jay] Clayton to truly fight for savers and uphold the principles from his speech, he should build upon last year’s Department of Labor fiduciary rule, rather than undermine it and start from scratch….Building from DOL’s rule should be music to Clayton’s ears under his sixth and seventh principles: “effective rulemaking does not end with rule adoption” — it requires rigorous analyses and detailed input — and “the costs of a rule now often include the cost of demonstrating compliance.”

Acting alone ignores the DOL’s extensive analysis and consultation, the significant compliance costs already borne by firms, and even the cost-benefit analyses conducted under Trump’s DOL that found the loss to investors by delaying the rule greatly exceeded reduced compliance costs for the interim.

If Clayton truly wishes to implement the principles he has laid out for the SEC to protect investors, he should start by endorsing the DOL rule as a solid, carefully crafted approach that has been thoroughly vetted and is well on its way to implementation.

Source: SEC should follow the Labor Department’s fiduciary standard – MarketWatch

Who Is Winning With the Fiduciary Rule? Wall Street – WSJ

Surprised?

The brokerage business fiercely fought the new retirement advice rule. But so far for Wall Street, it has been a gift.The rule requires brokers to act in the best interests of retirement savers, rather than sell products that are merely suitable but could make brokers more money. Financial firms decried the restriction, which began to take effect in June, as limiting consumer choice while raising their compliance costs and potential liability.

But adherence is proving a positive. Firms are pushing customers toward accounts that charge an annual fee on their assets, rather than commissions which can violate the rule, and such fee-based accounts have long been more lucrative for the industry. In earnings calls, executives are citing the Department of Labor rule, known varyingly as the DOL or fiduciary rule, as a boon.

Source: Who Is Winning With the Fiduciary Rule? Wall Street – WSJ

Trump Wants to Do to the Fiduciary Rule What He’s Doing to the Climate

Donald Trump and the Department of Labor are delaying — and possibly killing — the fiduciary rule, which would have required investment managers to put their clients’ interests first instead of directing them to higher-fee options that benefit the money managers themselves. The White House’s Council of Economic Advisors found that the absence of this rule imposed as much as $17 billion in additional costs to retirees led to the Obama administration’s adoption of the rule over the massive efforts by the financial firms, including political contributions and lobbying. Money writes:

The Labor Department moved to delay the rule for two months, at the direct behest of President Donald Trump. President Trump signed a memorandum earlier this year in which he publicly came out against the rule and directed the Labor Department to review the impact of the regulation.

This setback comes at a time when the rule has a lot of support. Since the Labor Department proposed the delay a month ago and asked the public for comments, more than 178,000 letters poured into the Labor Department in support of the regulation, compared to just 15,000 letters in opposition. It required all financial advisors—including brokers with major firms like Merrill Lynch, Morgan Stanley and Wells Fargo—to act as fiduciaries, or in other words, in their clients’ best interest when advising people on their retirement savings.

While retirement plan beneficiaries say that they want their advisors to be fiduciaries and refrain from self-dealing, they do not want to pay for it, that is probably because they do not realize they are currently paying $17 billion for being sold products without full information about the fees. Whatever the fiduciary rule costs would be, they would be far less — and they would be disclosed.

Proponents of the rule have promised to challenge the delay in court. Stay tuned.

Why the Fiduciary Rule is Essential for the Economy

On Feb. 3 Trump also signed a presidential memorandum instructing the Labor secretary to evaluate a specific regulation placed on financial advisers.

Known as the fiduciary rule, it requires brokers in charge of retirement plans to act in their clients’ best interest.

The rule is set to take effect on April 10, but that may not happen now. Financial columnist Terry Savage thinks the average American investor, who puts their faith and money in the hands of investors, will suffer if the safeguard is scrapped.
“This fiduciary standard was so needed,” Savage said. “Doing away with it is like saying, ‘OK, go ahead and cheat little old ladies and little old men if they retire with these rollovers and are wondering what to do with their money.’”

Will Trump kick-start the engine of investment by cutting regulatory red tape or leave Main Street investors vulnerable by ditching consumer protections?

Watch a discussion of the fiduciary standard with two of our favorite experts, Terry Savage and William Birdthistle.

Inside Wall Street’s War Against the Fiduciary Rule | Money

For years, many brokers have been allowed to push expensive or risky investments, even if there were cheaper alternatives, under what was known as the “suitability standard”: Investment recommendations needed only be “roughly suitable” for the client. In practice, that means if your advisor is weighing two similar investments, and one pays out a greater commission, he or she can put you in that one—even if the alternative would trim your fees and increase your overall returns.

The White House’s Council of Economic Advisers found this conflicted advice costs Americans around $17 billion a year. Put another way: If you’re a 45-year-old with $100,000 in retirement savings, you could lose $37,000 through these conflicts alone by the time you retire at 65, the Council found.

By last year, the U.S. government looked poised to start changing that. After an eight-year effort, the Department of Labor—which oversees retirement savings—developed a rule that would require any financial advisor managing a retirement account to put you in the best investments available. It’s arguably the biggest change in retirement savings law since the benchmark Employee Retirement Income Security Act of 1974.

That “fiduciary rule”—so named because it required retirement advisors to act as fiduciaries, in their clients’ best interests—was set to roll out in April. But under President Donald Trump’s administration, the fate of the new rule is now in serious doubt. On Friday, President Trump issued an executive order that directs the Labor Department to reassess the entire initiative. That is probably welcome news to Wall Street, which has waged a never-ending war around the fiduciary standard on legislative, judicial and public opinion fronts.

Source: Inside Wall Street’s War Against the Fiduciary Rule | Money

Fiduciary Rule Announced, Challenges Expected

The Department of Labor has published its long-awaited fiduciary rule

Labor Secretary Thomas Perez said,

With the finalization of this rule, we are putting in place a fundamental principle of consumer protection into the American retirement landscape: A consumer’s best interest must now come before an adviser’s financial interest. This is a huge win for the middle class…Today’s rule ensures that putting clients first is no longer a marketing slogan. It’s the law.

Ted Knutson writes:

Final may not be final for the Labor Department’s fiduciary rule for pension plan advisors both proponents and opponents of the best interest standard are warning.

While praising the standard for promising to save workers billions, Labor Secretary Tom Perez and Consumer Financial Protection Bureau founder Senator Elizabeth Warren are cautioning the rule could still face withering assaults in the courts and Congress by Wall Street financial firms and their Republican promoters in the House and the Senate.

FINRA Sanctions Barclays Capital $13.75M for Unsuitable Mutual Fund Transactions, Related Supervisory Failures

The Financial Industry Regulatory Authority (FINRA) announced today that it has ordered Barclays Capital, Inc. to pay more than $10 million in restitution, including interest, to affected customers for mutual fund-related suitability violations. These suitability violations relate to an array of mutual fund transactions including mutual fund switches. Additionally, the firm failed to provide applicable breakpoint discounts to certain customers. Barclays was also censured and fined $3.75 million.

via FINRA Sanctions Barclays Capital $13.75M for Unsuitable Mutual Fund Transactions, Related Supervisory Failures.