Obama proposes tougher consumer rules to protect IRA investors

President Obama on Monday proposed tougher regulations on investment brokers who handle retirement funds, saying new rules would limit hidden fees, “back-door payments” and conflicts of interest that eat into middle-class Americans’ savings.

Warning against advisors who are “bilking” clients and selling “snake-oil,” Obama billed the move – a revival of a effort quashed by industry opposition four years ago -- as part of his renewed focus on a populist economic message. He stood with consumer advocates, retirees and Sen. Elizabeth Warren (D-Mass.), the liberal favorite who has pushed the administration to tighten Wall Street regulations.

“We’ve got a lot more work to do to make sure the recovery reaches every single American out there and not just those at the top,” Obama said in remarks delivered at AARP headquarters.

The proposed rule, which Obama can put in place without congressional approval, would impose a requirement on some financial advisors to act as what the law calls “fiduciaries” for their clients, meaning that when they recommend or sell investments, they would be required to put the clients’ interests ahead of other factors, such as their own compensation or company profits.

The aim is to crack down on advisors who steer investors to products that provide hidden payments or generate higher fees, and not necessarily those that provide the best returns.

Currently, advisors are required to recommend “suitable” investments for clients, but that standard leaves considerable room for abuses, according to consumer advocates who have long called for imposing a fiduciary requirement.

The White House says that conflicts of interest cost savers millions. A report released Monday by the Council of Economic Advisors estimated that investors receiving “conflicted advice” earn lower returns – roughly 1 percentage point lower each year – than other investors. That adds up to roughly $17 billion in lost returns in IRAs each year, the report said. Over time the losses build to tens of thousands of dollars for average workers.

Financial services industry officials dispute those estimates, saying the losses are smaller.

The Department of Labor proposed similar regulations in 2010, only to see a strong industry pushback and criticism from lawmakers in both parties. Opponents argued that the rules as written would have inadvertently prevented investors from receiving important advice and would have dictated how firms could compensate their employees.

The new version of the proposal includes exemptions aimed at addressing those concerns, officials said.

The president, however, suggested that some of the financial industry’s complaints were overblown. Rules governing retirement investing are decades old and in need of updating, he said.

Input from Wall Street will be welcome during the process of writing a final version of the regulation, he said, but “what I won’t accept is the notion that there’s nothing we can do.”

“These industry doomsday protections have not come true in other countries” that have taken more aggressive steps, Obama argued. And while some firms may suffer under the new rule, if their advisors are “bilking” clients, “then you shouldn’t be in business. That’s pretty straight-forward.”

The tough talk came from a president trying to burnish his record on financial regulation as the clock ticks down on his tenure. Obama argued that the reform he enacted in the wake of the banking collapse “has been meaningful, it has been effective.”

The White House enlisted Warren’s advice on this and other economic proposals – making a relatively rare attempt to win the public approval of an advocate who is beloved by many Democratic liberals, but not so much by Wall Street. Warren recently met with Obama’s top domestic policy advisor, Cecilia Munoz, to discuss this proposal, as well as measures on community colleges and student loans, a White House official said.

The announcement comes as Republicans are preparing to outline their top economic proposals in a budget. Officials say the president will try to draw a stark contrast in the coming weeks by making announcements about proposals they say will boost wages, make college more affordable and protect consumers.

“These steps -- which will have a real, tangible impact on millions of working- and middle-class Americans -- come at a time when Republicans in Congress are pushing the same failed trickle-down economic policies that led to the worst economic crisis since the Great Depression,” White House senior advisor Brian Deese said on Monday in an email announcing the regulations.

A White House fact sheet did not detail the precisely how the new exemptions would accommodate some of the industry’s past concerns. The exemptions were described as “more principles-based” and the new proposals would not prohibit revenue-sharing or commissions or dictate how firms pay their advisors, the fact sheet said.

The White House said the new higher standards would not apply to advisors providing “general education” about employer-sponsored retirement plans and IRAs.