What Mark Anderson wanted was simple: to work in the best interest of his clients, free of ethical conflicts. But to do so, the financial adviser eventually found, he would have to leave his job at Edward Jones, a household name in retirement advice.

Anderson was a model employee. The 15-year veteran’s Seattle-area office was the third-largest branch in the country, and executives eyed him for top leadership. But as Congress began debating the 2010 Dodd-Frank Act, which would empower federal regulators to prevent brokers like him from offering conflicted advice, he began asking questions: How would Edward Jones adapt?

According to Anderson, every superior he asked had the same answer: “Nobody knows.” Finally, Anderson said, a senior manager said, “We’re not going there until we’re forced to.”

That moment has now come. This week, the Labor Department is expected to roll out a rule that will curtail conflicts of interest and require companies to enforce a fiduciary relationship, where a client’s best interests must come before the profit interest of the adviser.

As the law now stands, advisers who help millions of Americans save for retirement are under no obligation to work in their clients’ best interests. Unbeknownst to many savers, advisers are incentivized with bonuses and perks like free vacations to recommend products based on the commissions they bring, rather than whether a product is best for clients.

An adviser may offer two similar large-cap growth mutual funds, one of which comes with a substantially higher commission, creating an incentive to sell the higher-paying fund, regardless of whether it performs better than its rival. Or a broker may pile huge amounts of investors’ savings into a single mutual fund family due to the bulk discounts afforded by the fund company.

“You end up making decisions that steer people to particular types of products because of commissions,” said Anderson. “The commission becomes the paramount justification for the transaction.”

The arrangement, which regulators have termed "conflicted advice," costs retirement savers $17 billion a year from fund underperformance and added fees, according to the president’s Council of Economic Advisers.

The idea that there was an alternative to the model was a revelation to Anderson, who had become leery of the existing system. He began attending outside conferences for fiduciaries — advisers who earn a flat fee instead of commissions. It was “a whole world I had never seen,” Anderson said.

But at Edward Jones he felt a growing unease. One day as they watched their children play, Anderson’s wife told him, “You’re almost miserable now. What do the next 20 years look like?”

From Main Street to Wall Street

Serving 5 million households, the 93-year-old Edward Jones has long set itself apart from its Wall Street competitors by targeting a broadly middle-class clientele, many of whom have less than $50,000 in savings. From its St. Louis headquarters spreads a 14,000-strong network of green storefronts that dot small-town America, each one home to a single adviser rooted in buy-and-hold financial advice.

Wealth managers can prosper by taking a small annual cut of the assets, and many brokerage firms set a minimum threshold for client assets, typically around $250,000. Advisers who serve small investors, by contrast, have come to rely on the upfront commissions that incoming federal rules would likely curtail.

The new rules, due Wednesday, would overhaul that compensation structure, affecting not just Edward Jones but the entire retirement advice industry and the middle-class families who are its clients. More than $7 trillion in American household savings reside in individual retirement accounts, or IRAs, a substantial portion of which rolls through companies like Edward Jones every year. Reforming the system has become one of President Barack Obama's top priorities in his final term in office.

Jim Weddle, managing partner of Edward Jones, speaks in New York, Oct. 4, 2011. Weddle's compensation was nearly $14 million last year. REUTERS/Brendan McDermid

The new guidelines may force Edward Jones, the largest privately held broker-dealer, to move away from a commission model. “They’re going to survive, but they’re going to have to make some dramatic shifts,” said a veteran home-office strategist who left Jones in the past year and asked not to be named, citing post-employment agreements. “Edward Jones is probably the least prepared to go over.”

The challenge for managing partner Jim Weddle and his firm is shifting from a business model where a third of firmwide revenue comes in the form of commissions to one built on a flat fee for advice, as advisers known as fiduciaries currently operate.

“It’s a completely different way of doing business,” the former strategist said.

Now a fiduciary at Tradewinds Capital Management near Seattle, Anderson embodies the tensions that financial services firms face between offering unconflicted advice to middle-class investors and running a business built on sales.

“As a fiduciary, I get to act as you would expect me to act,” Anderson said. “It’s freeing.”

An ‘Ethical Bunch’

Employees rate Edward Jones highly. In 2015 the company received its seventh consecutive J.D. Power award for employee satisfaction. Each of the 10 former employees and managers who spoke to International Business Times — half of them off the record — emphasized that the vast majority of Jones advisers act honorably. “Jones out in the field is as ethical a bunch of people you’ll find,” the former strategist said.

Yet a steady trickle of employees leave the tight-knit firm every year, perturbed at the inherent conflicts they felt as advisers. “I went into the business thinking I was going to be one thing and ended up being something else,” said a former Ohio adviser who left last year to be an independent fiduciary. “At the end of my years there I saw pretty questionable results for clients.”

Several sources asked to speak anonymously, citing legal concerns. Jones imposes stringent agreements on departing employees, including a 12-month ban on contacting former clients. Jones is one of only two major firms to refuse to sign an industrywide protocol giving advisers some access to former clients. Anderson settled a costly arbitration of his own with Edward Jones soon after he left.

“Edward Jones has been very aggressive in taking legal action against former employees,” said Chris Wells, a lawyer who has represented former Jones advisers. “We don’t see that many cases from places other than Edward Jones.”

The conflicts gnawing at these former employees rarely occur to clients. The saver who walks into an Edward Jones office is likely drawn to what one Jones advertisement called a “personalized brand of service.”

The monetary incentives that sway the adviser sitting across from them are visible only in the fine print. The problem, said Mercer Bullard, professor of law at the University of Mississippi, is “getting paid more for selling one product than another in circumstances where there’s no difference in the services offered.”

An A-share mutual fund, for example, charges an upfront fee that the adviser and firm split. Those sold by Jones carry commissions as high as 5.75 percent for clients of modest wealth. In contrast, an exchange-traded index fund that offers similar exposure may yield a maximum commission of just 1 percent.

For an adviser helping to invest $10,000, that’s a difference between pocketing around $50 for the ETF and roughly $200 for the mutual fund, after splitting the full $575 commission with Jones’ main office. For the typical early-career adviser, the ETF isn’t an option. “If you do that at Edward Jones you’re going to starve and wash out of the system because you don’t get a load off of it,” said the Ohio adviser.

For the client, the cost of fees can grow far higher. Over 30 years, a 1 percent difference in fees can erode one-fourth of a client’s returns on retirement savings.

‘A Sales Job’

The sales culture at Edward Jones is nurtured from the time training begins, former employees said. “It’s not about how good a money manager or risk manager you are,” the Ohio adviser said. “It’s about how good a salesman you are.”

Recruits travel to St. Louis for a high-intensity training program that former employees said focused principally on finding new clients — an expected 25 calls a day, one former adviser said — and selling them company-approved products.

“When they train you, they train you to sell specific things,” said Anderson. “You would have this quiver that has maybe three or four arrows. You want to talk mutual funds? Boom! I have a mutual fund I can sell you.”

“They tell you when you get there, ‘Hey, this is a sales job,’ ” said Michael Kothakota, who worked at Jones between 2005 and 2008.

Early on, new advisers go knocking door-to-door to pick up potential clients, a notorious rite of passage. New advisers sometimes work what employees call “half days” — that is, 12-hour days. The pressure-cooker training instills loyalty, advisers said. But the ambitious sales targets mean advisers’ livelihoods ride on their ability to rack up commissions.

“You’re basically trying to push as many clients as you can into that upfront charge,” Kothakota said.

The company eases new advisers’ transition into the complex field of investment advice by allowing only a limited range of products to be sold, the former home-office strategist said, ensuring consistency and propriety. “It wasn’t so much what will make the most money, but what will make the quick sale without having to teach people too much of how to deal with a client,” the former strategist said.

John Lindsey, a former general partner who left the firm in 2012, said the top-down oversight system was designed to deal with the high turnover and relatively minimal experience among advisers. “They manage to the least common denominator,” he said.

Some investors might prefer upfront commissions. A 2011 Cerulli survey found that 47 percent of potential investors would rather pay upfront charges than ongoing fees.

But government studies have shown that many clients remain unaware of their advisers’ incentives. That ignorance stems in large part from the complexity of the business, said Bing Waldert, an industry analyst at Cerulli Associates. “Just because there is a conflict of interest doesn’t mean there is something unethical going on,” Waldert said. “But I don’t know that clients are attuned to the conflicts.”

Five of the advisers who spoke with IBT, however, described grappling with those conflicts. Kothakota lost sleep over the tension he felt between serving the client and making a living, he said. “There were days when I couldn’t tell you whether what I did was more right for the client or myself.”

A Platform Built on Commissions

Though most commissions occur at the point of sale, other potential conflicts are woven more deeply into the fabric of the company. “The platform is completely built on a system of commissions,” said Anderson. A fiduciary relationship, he said, would require “a completely different system.”

It begins with what clients get to see. Advisers typically start with the Preferred Fund Families, a menu of products that are the most commonly shown, and sold, to clients.

Carla Astudillo/ International Business Times

Fund companies pay for the privilege. “What’s on the menu are only firms that are paying revenue-sharing agreements,” said Bullard, the law professor. Jones received a combined $184 million in revenue-sharing payments in 2015, a fifth of its net income for the year. One company, American Funds, paid nearly $50 million.

Former advisers said the arrangements skew their advice toward those particular funds. “You need a growth fund?” said Anderson, explaining the process. “Here’s a selected list of growth funds that we get kickbacks on.”

The system has drawn scrutiny in the past. In 2004, Jones had to pay $75 million and disclose its revenue-sharing agreements with third parties after the Securities and Exchange Commission found that Jones told investors its Preferred funds were chosen for their performance and objectives — failing to note the seven-figure kickbacks.

A universal fiduciary rule would likely bar these revenue-sharing agreements. “The adviser doesn’t have a conflict of interest,” Waldert, the industry analyst, said. “But the broker-dealer does.”

The incentives don’t end there. Among the top benefits at Jones are so-called diversification trips. Employees who meet a set of benchmarks qualify for biannual vacations to locales like Puerto Vallarta, Mexico. Often coordinated with companies whose products Jones sells, the trips are valued at up to $8,000 per couple.

The benchmarks include product-specific sales goals, as well as quotas relating to how much new money advisers can entice. The popular program is intended to encourage advisers to diversify clients’ investments. But in the eleventh hour before deadlines, five former employees said, the quotas can spur a rush to sell products to investors who might not necessarily need them.

“You just pull up all your clients and see who could use a bond,” said the Ohio adviser. “You just start dialing so you can hit that metric and go with your family on down to Mexico.”

The ‘Holy Grail’ for Financial Advisers

The pot of money at the center of the fiduciary debate is the country’s vast store of IRA assets. The Employee Retirement Income Security Act of 1974, or ERISA, required managers of group retirement accounts to be fiduciaries. Brokers who oversaw IRAs, meanwhile, operated under a suitability standard, a lower bar that requires only that advice aligns with clients’ general needs and risk appetites.

In 1974, two-thirds of American retirement accounts were defined-benefit pension programs managed by fiduciaries. But a long shift out of pensions has left trillions of dollars in retirement assets in individual accounts.

When savers take control of accrued 401(k) savings, they often roll the funds into an IRA. That’s where financial advisers jump in. With large sums shifting at once, rollovers represent “the holy grail of every financial adviser,” said the former strategist. One adviser estimated that 40 percent of his commissions stemmed from rollovers.

As IRAs came to dominate American retirement savings, Jones expanded dramatically, growing from just under 400 advisers in 1980 to 14,400 today. Firmwide revenue topped $6.7 billion in 2014, up from $3.5 billion in 2010.

But the new rules proposed by the Labor Department, which curtail commissions and impose stiff disclosure requirements, could restrict the flow of IRA rollovers. Analysts at Morningstar estimated the industry could see industry revenue decline by $19 billion.

As legislators drafted the Dodd-Frank legislation, Jones lobbyists fought a provision that would empower the SEC to draft a fiduciary rule. That provision passed, but the SEC has yet to act, leaving the Labor Department to take the reins under authority provided by ERISA to oversee retirement savings.

Industry groups argue that the new standards could limit access to financial advice for less affluent savers, like the ones Jones serves, by making it unprofitable for firms to focus on middle-class investors. “For most Main Street advisers, the most affordable way is through a commission-based arrangement,” Dale Brown, president of the Financial Services Institute, told IBT.

In a letter to the Labor Department, Jones argued the proposed rule “would reduce access many investors have to information and support from financial advisers, in some cases eliminating their access altogether,” warning that the rule would “fall disproportionally [sic] on lower and moderate-income investors.”

Advisory Solutions

Though it was 2010 when the Labor Department floated an initial proposal for limiting conflicts of interest — an effort that withered under an onslaught of lobbying — firms like Edward Jones have long braced for a regulatory shift.

In 2007, Jones noted in a filing the likelihood that new disclosure rules could affect mutual fund sales. Such a rule, the company said, would “significantly impact the disclosure and potentially the amount of compensation” derived from mutual funds. In 2015 filings, Jones said the Labor Department’s rule “would impact a significant portion of client assets under care.”

Jones and other broker-dealers have adjusted to varying degrees. LPL Financial has overhauled its price structure to adjust to the coming rules. “We have a new regulator in our industry,” LPL chief operating officer Dan Arnold told the magazine Financial Advisor. “Regulatory scrutiny will only trend upwards.”

In recent years Jones has required new advisers to earn dual certifications as brokers and fiduciaries. And by 2010 the firm was swiftly moving clients into its Advisory Solutions platform, accounts managed by Jones headquarters for a flat fee that ranges up to 1.5 percent. (For comparison, mass-market firms like Vanguard and robo-advisers like Betterment charge asset management fees between 0.15 percent and 0.3 percent.)

Advisory Solutions was a philosophical shift for Jones, which long eschewed in-house management in favor of selling funds run by outside partners. But the accounts, which now hold $142 billion in assets, allow advisers to circumvent commission-based conflicts of interest.

In the past decade, the share of Jones revenue stemming from these asset-based fees has more than doubled, accounting for more than 50 percent of total revenue in 2015. Meanwhile, commissions sales fell from 60 percent to 32 percent of total revenue.

According to former higher-ups, executives are still focused on sales, but with a new type of product. “They’re putting heavy pressure on their advisers to sell their Advisory Solutions platform,” said Lindsey.

Despite the changes, however, commissions permeate every level of the firm, and former employees said that everything from training procedures to the way senior partners are compensated would need to be rethought in a fiduciary world.

Jones representative John Boul, reached before the Labor Department rule was finalized, said the company could not comment on the firm’s broader strategy or specific conflicts of interest. “We support a uniform fiduciary standard that puts the investors' interests first, preserves investor choice in they how to pay for retirement service, and promotes investor access to working with a financial professional,” Boul said.

The former strategist, who planned aspects of the firm’s strategy after Dodd-Frank passed, has a dim outlook for Jones. “The fiduciary standard is going to shake everybody up so much because they can’t drive product,” he said, referring to commission-based sales. “And product is a whole lot easier to sell than real needs-based planning.”