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How Wall Street Siphons Billions From Retirees — And Gets Away With It

Phil Ashburn started working at Western Electric in 1972 and stayed there for 30 years, even after the company split up. Eventually he ended up at a phone company called Pacific Bell. “It was a great company to work for. The company took care of you and you took care of the company,” he said.

But in 2002, when he was 51, Pac Bell started offering employees buyouts. “I could either take that package, or I could retire on the company pension, which would have been about 1,500 bucks a month, or just ignore it all and continue working,” he said. While his company offered many generous benefits, “one thing they didn’t give us was an education on finances,” he said, and he didn’t know what to do when the buyout option came up. Some of Ashburn’s friends who had already retired from the company suggested he speak with Sharon Kearney, who had come around offering financial advice in the past, but she wasn’t a financial adviser – she was a broker for a financial firm.

Phil Ashburn

Phil Ashburn

CREDIT: Phil Ashburn

Pac Bell didn’t invite Kearney to come, but she somehow found a way to give workshops at the company’s facilities. As a result, many of the employees assumed she was a good person to turn to for financial advice and might have even thought she was endorsed by the company. And she allegedly gave advice that sounded remarkable: “She said things to them like, ‘You’ll be set for life,’” said Sheryl Garrett, founder of the Garrett Planning Network who served as an expert witness in litigation over lawsuits since brought against the broker. “That’s a quote I heard very frequently from people who didn’t even know each other.”

Kearney allegedly told them they would have enough money to maintain their standard of living and even have some extra to leave to their families. She told Ashburn to take the buyout and invest his money with her. “The way she presented it to me was this was a no-brainer,” he recalled. He remembers her saying, “I could make you rich. You invest money in me, you will make money, you will earn money, you’ll never go broke, you’ll have money to leave for your wife and family when you’re gone, and you can even withdraw money every week.”

So Ashburn took the buyout and invested the $355,000 he had saved up in his pension and retirement accounts in a variable annuity, a product that fluctuates based on market performance. The way the adviser talked about it, he assumed his investment would more than double in a short amount of time. Today he’s down to about $70,000 and dwindling thanks to the stock market’s decline during the financial crisis and his need to make withdrawals to make ends meet.

“I was ignorant about money,” he said. “I had all the trust in the world in this woman.”

Why would this retirement broker push people into financial insecurity? Because it was the only way she could make money, and it was perfectly legal. Kearney worked solely on commission. “She had zero ways to get paid unless she could talk the employees into taking their early retirement out,” Garrett noted. And she stood to make a killing. She testified that she made $900,000 in commission from selling variable annuities in a year. Since her commission was about 7 percent, she likely made nearly $25,000 from getting Ashburn to move his money.

“The bottom line with these victims is they would all have been better off never meeting this adviser,” Garrett said.

It might sound like common sense that people who give others advice on investments have to put the investors’ interests over their own interest in making money, but that isn’t how the current regulations work. The Obama administration wants to change that. On Monday, it will announce its support for efforts underway at the Department of Labor (DOL) to broaden the fiduciary standard so that these advisers would have to put clients’ interests first.

The Obama administration wants to change the regulation enacted in the Employee Retirement Income Security Act (ERISA) of 1974, which applied a fiduciary standard to anyone giving investment advice to retirement plans. The idea was to require those advisers to act in the sole interest of the plan participants. But it also included carve outs that have come to take on more and more significance as the way we save for retirement has shifted.

“If you think about the world that existed when these rules were adopted, it was a world in which ERISA applied primarily to traditional pension plans,” explained Barbara Roper, director of investor protection at the Consumer Federation of America. “A sophisticated pension fund manager could probably navigate the system.”

But today, fewer and fewer workers get pensions. Instead, they rely on individual retirement accounts like 401(k)s and IRAs. The loopholes in ERISA “make it very easy for broker-dealers to offer their services to an individual without being covered by the fiduciary protections that ERISA was intended to provide,” she said. All they have to do is give one-time advice to pull money out of an account or say that it’s just a recommendation, not the final basis of a decision.

This happened with Ashburn and the broker who showed up at Pac Bell. “It shifted all the responsibility from the employer to make sure they get that paycheck for the rest of their lives and transferred it to the employees, almost none of whom had any interest in managing their money,” Garrett explained.

The administration’s pending proposal has sparked a pitched battle from the financial services industry, which is intent on making sure things not change.

A lot of money is at stake. People like Kearney stand to lose out on a lot of profit. A leaked White House memo on the DOL’s rule change surveyed research that indicates the conflict of interest at its heart means individual investors are losing anywhere from $6 billion to $17 billion a year. That means the average retiree stands to lose at least 5 to 10 percent from his retirement savings, according to the memo.

This is a distinctly middle-class danger. Low-income Americans don’t tend to work at jobs that offer 401(k)s, let alone pensions, and often can’t save anyway because they need all of their income to get by. The wealthy have plenty of assets to fall back on and can shop around for financial advice.

But people like Pac Bell employees, who were mostly making around $40,000 to $50,000 a year, store up money in retirement accounts and need help figuring out how to make it last for the rest of their lives. Starting in the 1980s, the share of workers earning “defined-benefit” pension plans, in which an employer guarantees a certain payout to a retired worker, began to plummet. Meanwhile, the share with “defined-contribution” plans such as 401(k)s where employers contribute a set amount and the payout is up to individual investment choices skyrocketed.

“The middle-income market needs to make every dollar count,” Roper said. “They cannot afford to have broker-dealers and mutual fund companies siphoning off money.” Today, most people have little put aside for their golden years: last year a survey found that about a third of working-age people had less than $1,000 in savings and retirement accounts. The gap between what American workers should have set aside and what they actually have stored away comes to $6.6 trillion.

“This is an issue that gets to the heart of the financial anxiety families are facing around retirement,” said Joe Valenti, director of asset building at the Center for American Progress. “Whenever you have folks who are desperately looking to get money quickly or make money quickly, you’re opening up to all different kinds of sales pitches that aren’t necessarily appropriate.”

The industry argues that clamping down on conflicts of interest will hurt the investors that advocates want to protect in the first place by decreasing their access to financial advice. The groups warn that if brokers can’t make money they way they do now, they won’t be able to offer as many of their services, particularly to rural and underserved communities. They also warn it could drive up costs. Kenneth Bentsen, CEO of the Securities Industry and Financial Markets Association (SIFMA), also told the Wall Street Journal that the White House’s data is dated and not conclusive. Interview requests for SIFMA and other industry groups were not returned.

The opposition makes sense from a business standpoint, argues Robert Hiltonsmith, a senior policy analyst at Demos. “The reason they’re fighting so hard is because, to be frank, forcing advisers…to actually act in their clients’ best interest would put a pretty big dent in their profits,” he said. “I think it’s rational of these companies to basically charge as much as they can. They’re trying to maximize their profits.”

“It’s a question of being able to move toward different forms of compensation,” Valenti argued. Charging a fee for an adviser’s services means that even if he doesn’t make as much money as he would have on commission, money is still made no matter what the advice may be. On the other hand, charging an upfront fee is much more visible to a client than a commission. The DOL’s rule is not expected to ban the commission structure or make it overly burdensome, as a proposed rule that was shot down in 2010 would have.

It also means that advisers would have to start telling clients to keep their money put, which in a commission-based structure reduces the ability to make money off of selling them on new products. “In many instances the honest answer will be your best bet is to keep your money in a 401(k) plan,” Roper explained. “Or they’ll have to actually compete by offering investment alternatives that are more attractive. In either case, that eats into their bottom line.”

The industry may also have politics on its side. These kinds of financial advisers tend to be local and part of the community. “It’s tricky to separate out someone who’s supposed to help you from someone who’s there to sell a product,” Valenti noted. Plus broker-dealers can often take the time to go to their Congressional representative’s offices and make their case.

Phil Ashburn has since figured out what happened when he spoke with the broker decades ago. He and his family quickly found out that they did not in fact have enough money to live out their days in comfortable retirement. After Garrett ran an analysis, she found only one former Pac Bell employee could actually have afforded to retire then, and only because of her spouse’s income. “Almost everyone returned to work immediately,” Garrett said.

Ashburn doesn’t have that option. “I’m going to be 65 years old this year, how employable is a 65-year-old person nowadays?” he asked. “So the concept of starting a new career, that’s really out the window.” He trains dogs, which brings in some income, and his wife still works full time. But once she retires, he fears that they won’t be able to keep the house they’ve lived in for 40 years. In the meantime, they can’t buy gifts for their grandchildren or go on vacations and often skip eating out so they can afford their bills. “Things just aren’t like I expected them to be when I reached my retirement age,” he said.

“This is something I wake up thinking about every morning,” he said. “My stomach is tied in knots. I feel like a failure. It plays on you mentally and physically.”

Ashburn is now part of a six-person lawsuit against Kearney. “With the promises of always making money, it was a dream come true,” he recalled thinking when he first got the broker’s advice. “But it wasn’t a dream. It ended up being a nightmare.” If he had never met her, he thinks he would have kept working at the plant and socking money away for his retirement. “If I would have had an honest financial adviser,” he noted, “then I might have still gone in this direction but at least I would have had an honest appraisal of what to expect in the future.”

Ashburn’s hopes now hang mostly on the lawsuit. It has already gone through a round of arbitration and he and his fellow plaintiffs lost, but the verdict was overturned on procedural matters, so it’s starting again. If he and the other former Pac Bell employees can prove the broker either misrepresented herself or committed fraud, she and her company will have to make them whole. He says he’s heard that could mean they stand to see anywhere from $750,000 to over $1 million each. “I’m trying not to get my hopes up,” he said. But “if we happen to win in the future, then I might be keeping my house. But that’s the only saving grace I have.”

“It’s not just somebody’s bank account they’re messing with, they’re messing with people’s lives. They’re shattering the dreams people worked a whole career for,” he said.

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