President Barack Obama threw his support behind the Department of Labor’s proposed fiduciary rule Monday afternoon, saying new uniform rules are needed to ensure financial advisers always act with their clients' best interest in mind.
The President, who spoke at AARP’s headquarters, called on the DOL to update their long awaited fiduciary rule. The proposed rule would require advisors overseeing retirement plans to act under a fiduciary standard, putting client interests ahead of all other considerations when making investment recommendations on accounts covered under the Employee Retirement Income Security Act.
“Outdated regulations, legal loopholes, fine print, makes it harder today for savers to know who they can trust,” the President said. “Financial advisors absolutely deserve fair compensation for helping people save for retirement and helping people manage their investments—but they shouldn’t be able to take advantage of their clients.”
Ahead of Monday’s speech, the White House Council of Economic Advisers released a report showing conflicts of interest on retirement assets result in annual losses of 1 percentage point for affected investors. The Council estimates the aggregate annual cost of conflicted advice is about $17 billion each year.
Monday’s announcement by the President marks the first step to re-proposing the DOL’s rule, which the agency first put forward in 2010. The DOL is expected to submit the proposal for review by the OMB, a process that could prove lengthy.
In the first six months of 2013, it took the OMB an average of 140 days to complete a review, according to research done by Curtis W. Copeland, a specialist in American government at the Congressional Research Service within the U.S. Library of Congress. Under an 1993 executive order in effect, the OMB’s Office of Information and Regulatory Affairs should complete reviews within 90 days, with the option to extend the review period by an additional 30 days.
While no one is certain of what the new rule will look like until after OMB review, it’s expected to expand the definition of a fiduciary to anyone who provides advice to retirement plans, including individual retirement accounts and 401(k)s.
For years, investor advocate groups have argued that commissions earned by brokers—who are not legally obligated to act as fiduciaries—incentivize transactions that hurt consumers. That would include such things as advising clients to roll 401(k)s into IRA accounts, which could include higher fees and lower returns, and excessive trading in retirement savings accounts.
But throughout the course of the rulemaking process, the DOL has faced harsh criticism from both the industry as well as parties such as the Securities Exchange Commission. On Friday, Commissioner Daniel Gallagher called the initiative a “widely unpopular rulemaking” and condemned a recently leaked White House memo in support of the rule “thinly-veiled propaganda designed to generate support.”
Industry groups such as the Securities Industry and Financial Markets Association and the Financial Services Institute have taken lead roles in voicing concern about the effects of a DOL rule. They’ve argued a rule similar to the DOL’s initial proposal could limit the public’s access to quality financial advice.
"We have ongoing concerns that the DOL and the White House have completely ignored the existence of the robust regulatory regime under SEC and FINRA, and this re-proposal could make it harder to save for retirement by cutting access to affordable advice and limiting options for savers," Ken Bentsen, SIFMA president and CEO, said in a statement Monday.
Once the proposal is released to the public following the OMB review, FSI says its staff will review to see if the DOL has been as surgical as they claim they will be, FSI’s Robert Lewis said last month. "We’re going to give them the benefit of the doubt up until we read it."
President Obama acknowledged the DOL has a fight on their hands, saying there are “special interest groups who will fight it with all they’ve got,” but scoffed at arguments put forward around the proposed rule would cause costs to skyrocket and a decrease in services. “These industry doomsday predictions have not come true in other countries that have taken more aggressive action than we’re proposing. If your business model rests on taking advantage, bilking hard-working Americans out of their retirement money, then you shouldn’t be in business.
Updated 2:45 p.m. to include remarks by President Obama at AARP headquarters.
