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Obama: Financial advisors must put client interests first

Last Updated Feb 23, 2015 3:50 PM EST

President Obama urged the Labor Department to updatestandards for financial advisors Monday, saying that all Americans deserve the "peace of mind" that they are getting sound advice on investing their hard-earned money.

The Labor Department issued a new draft rule would require retirement advisors to put their clients' best interests before their own profits and prevent them from steering people toward investment products that have lower returns but make more for the advisors. The administration estimates "backdoor payments and hidden fees" cost lower- and middle-income families one percentage point on their annual returns for retirement investments like IRAs and 401(k) plans. That equates to about $17 billion in losses each year.

"It's a very simple principle. You want to give financial advice, you gotta put your client interest first. You can't have a conflict of interest," the president said at an AARP event. "This is especially important for middle class families who can't afford to lose even a penny of the hard-earned savings that they've put away."

Labor Secretary Thomas Perez told reporters that the new rule is important because people naturally assume that those giving them advice are looking out for their best interest.

"That is simply not always the case as a result of our current regime," he said.

Under current rules, only financial planners with so-called "fiduciary duty" must invest with the best interest of their clients in mind. Those without fiduciary duty may guide investments based on what is "suitable" for their clients. The administration calls this "conflicted advice," in which some advisors act in their own interest, steering their clients' money into products with high fees and commissions.

The rule proposal would require retirement advisors to abide by the "fiduciary" standard, with some exemptions. There will also be a consumer education piece. The rule is expected to guard against advisors reaping excessive fees when a client rolls over a 401(k) upon switching jobs or retiring.

"When you have a broker who has their compensation directly tied to the advice that they're giving to a person, often without that person not even knowing that's the case, they're going to systematically very often have a big incentive to steer people toward products that aren't necessarily the best interest of their client but instead offer them the greatest compensation," said Jason Furman, the Chairman of the Council of Economic Advisors.

The rule is not without its detractors, though. Securities and Exchange Commission (SEC) member Daniel Gallagher said at an SEC event last week that a White House memo about the proposed rule was "thinly veiled propaganda" for an unpopular rule the department proposed back in 2010.

The president addressed the critics head on Monday, saying that "industry doomsday predictions have not come true in other countries that have taken even more aggressive action on this issue than we're proposing. And if your business model rests on taking advantage, bilking hardworking Americans out of their retirement money, then you shouldn't be in business."

He also said that many financial advisers already follow the safeguards he is proposing, and that the new rule will level the playing field for them.

The proposed rule will be submitted for review to the Office of Management and Budget Monday, before undergoing a public comment period. Perez did not estimate when it could be adopted and said that tomorrow is just the announcement. It will be a while before any changes are enacted.

The Wall Street Journal reports that the rules are expected to be more flexible than the 2010 proposal, which the Labor Department ultimately scrapped due to anger from the financial world. Opponents of such a rule have warned that it will reduce clients' options and even drive up the cost of financial advice.

Kenneth E. Bentsen, Jr., the president and CEO of the Securities Industry and Financial Markets Association, said, "We have ongoing concerns that the DOL and the White House have completely ignored the existence of the robust regulatory regime under SEC and [Financial Industry Regulatory Authority], and this re-proposal could make it harder to save for retirement by cutting access to affordable advice and limiting options for savers. The DOL re-proposal could ultimately raise the cost of saving and hurt all Americans trying to save for retirement, particularly middle-class workers."