President Barack Obama is launching a crackdown on the US pensions industry, where the White House says Americans are losing billions of dollars at the hands of advisers who put their own profits before clients’ interests.
In a fresh attack on Wall Street, Mr Obama will on Monday order officials to press ahead with rules to stop the industry steering customers towards bad products — a practice the White House compares to the peddling of bad mortgages before the financial crisis.
The Obama administration said that irresponsible advice had cost Americans a combined $17bn, based on findings that savers receiving advice affected by conflicts of interest earn annual returns that are roughly 1 percentage point lower than they would otherwise be.
The proposed rules will require brokers and advisers to abide by a “fiduciary” standard, meaning they must act solely in the best interests of their clients, and are likely to spark a fierce backlash from parts of the pensions industry.
A report from the White House Council of Economic Advisers found that some Wall Street businesses had an incentive to persuade consumers to buy bad retirement products — with high costs and low returns — because they earned “backdoor payments and hidden fees” from them.
“You could end up with tens of thousands of dollars less simply because your adviser is not required to put your interest first,” said Jeff Zients, director of the White House National Economic Council. “No one would put up with the current rules if they were aware [of them].”
The US labour department is in charge of updating the rules and its proposal will be sent to the Office of Management and Budget on Monday for review. It will then be released for public comment, a major step in the advancement of a rule that has been in limbo for five years.
The fiduciary duty rule was proposed in 2010 but abandoned after a backlash from the brokerage industry and Republicans. They warned the rule would put many investment advisers out of business, which would deprive consumers of assistance. The industry repeated those warnings last year.
A senior regulator at the Securities and Exchange Commission, the securities industry watchdog, also criticised the impending administration move last week, following the leak of a White House memo about brokers pushing clients to high-fee retirement accounts.
Daniel Gallagher, a Republican SEC commissioner, said: “To be blunt, the White House memo is thinly veiled propaganda designed to generate support for a widely unpopular rulemaking.”
Obama administration officials said the latest proposal would greatly differ from the 2010 plan.
For example, it will include an economic analysis and exemptions that were not a part of the 2010 proposal. The new plan will not ban commissions or other common compensation practices, but officials declined to provide more details.
“Let’s level the playing field and let’s eliminate surprises,” said Thomas Perez, US labour secretary. “This is a win-win. Both the industry can do well and consumers can do well.”
Not everyone in the industry is against the rule.
Jack Bogle, founder of Vanguard, the fund management group, praised the labour department for taking this step, saying he has been calling on a federal fiduciary standard for years.
White House officials say the rule needs to be updated due to a sharp fall in the number of Americans covered by defined benefit pension plans, which offer a guaranteed income in retirement.
Instead, many people now rely on defined contribution pensions, which place greater onus on individuals to make decisions about their own investments.
More than 40m consumers have more than $7tn in savings in individual retirement accounts or IRAs.
The SEC is working on its own fiduciary standard for retail financial advisers, which was mandated under the Dodd-Frank legislation prompted by the financial crisis.
Mary Jo White, chairwoman of the SEC, has acknowledged the availability of advice could be reduced.
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