Obama directs Labor Department to move ahead on fiduciary rule

President says conflicted advice is costing Americans billions and must be removed from retirement plans

Feb 23, 2015 @ 8:45 am

By Mark Schoeff Jr.

+ Zoom
(Bloomberg News)

President Barack Obama on Monday directed the Department of Labor to move ahead with a proposal that would raise investment-advice standards for brokers handling retirement accounts.

In a speech at AARP in Washington, Mr. Obama said there are many financial advisers who receive “back-door payments or hidden fees for steering people into bad retirement investments that have high fees and low returns,” reducing retirement nest eggs.

“These inducements incentivize the brokers to make recommendations that generate the best returns for them, but not necessarily the best returns for you,” Mr. Obama said at the event that also featured Sen. Elizabeth Warren, D-Mass., and other lawmakers.

In advance of the speech, the White House released a fact sheet stating that protecting workers and retirees from conflicted investment advice is part of the president's focus on “middle-class economics.”

The document asserted that investment advice that benefits brokers' firms rather than investors causes investors to lose 1 percentage point annually on their returns. In a report released Monday, the White House Council of Economic Advisers said conflicted investment advice for retirement accounts costs about $17 billion each year. These figures largely reflect a leaked White House memo that circulated around the press and the advice industry last month, and was posted on The National Association of Plan Advisors website.

Mr. Obama said the DOL would re-propose a rule that would require more brokers to abide by a fiduciary standard and put the best interests of their clients above their own when providing advice on retirement savings.

A vague timetable for next steps was given in the fact sheet, which said the Labor Department will issue "in the coming months" a notice of proposed rulemaking and seek public comments on "the best approach to modernize the rules on retirement advice and set new standards, while minimizing any potential disruption to good practices in the marketplace." The pending DOL rule would first need to be reviewed by the Office of Management and Budget, which could take up to 90 days or more.

“We're going to keep on pushing for this rule,” Mr. Obama said. “It is the right thing to do for our workers. It's the right thing to do for our country.”

Mr. Obama did not paint all advisers with the same brush.

“There are a lot of very fine financial advisers” who do the right thing for their clients, he said. He specifically cited Sheryl Garrett, founder of the Garrett Planning Network, who was in the audience at the AARP event.


The White House move is the first substantial development on the DOL proposal since the original rule was withdrawn in 2011 following fierce protest by the financial industry, which said the rule would sharply raise regulatory costs and liability for brokers and price them out of the advice market for middle-income investors.

The Securities Industry and Financial Markets Association criticized the pending DOL rule, saying the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc., the industry-funded broker-dealer regulator, already had rules on the books to protect retirement savers.

“The new regulation could limit investor choice, cause inconsistencies as different regulators would apply different standards to the same retirement accounts, prohibit access to investor guidance and raise the costs of saving for retirement,” SIFMA president and chief executive Ken Bentsen Jr. said in a statement. “As the process moves forward, OMB must consider all of the facts, including the fact that the brokerage industry is highly regulated by the SEC and Finra, including with respect to retirement accounts, and in particular, recent guidance by Finra with respect to rollovers.”

The SIFMA opposition was similar to comments made by SEC member Daniel Gallagher Jr. last week.

In a Feb. 20 speech at the Practising Law Institute's SEC Speaks conference, Mr. Gallagher said existing regulations that mitigate conflicts of interest in investment advice work better than a complete ban on conflicts, which he asserted the DOL rule would implement.

“Our rules expressly prohibit brokers from churning client accounts,” Mr. Gallagher said.

In his speech Monday, Mr. Obama dismissed criticism of the DOL’s fiduciary-duty effort.

“These industry doomsday predictions have not come true in other countries that have taken even more aggressive action than we’re proposing,” Mr. Obama said.

And Barbara Roper, director of investor protection at the Consumer Federation of America, disputed the notion that regulators' rules already protect retirement accounts.

“It is fundamentally inaccurate to suggest that the SEC and Finra have full jurisdiction in this area,” she said.

Ms. Roper added that the suitability rule, which requires brokers to sell products that fit their clients investment needs but doesn't mandate that they act in their best interests, governs rollovers from company 401(k) retirement plans to individual retirement accounts.

“That's not good enough for the most important investment decision most people will ever make,” Ms. Roper said.

She added, “The White House appears to be throwing its full weight of support behind this rulemaking, which is very good news for retirement savers.”


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