Time for Broker Crackdown as Abuses Cost Retirement Savers Billions: Obama Aide

One of President Barack Obama’s top economic advisers said abusive trading practices are costing workers billions of dollars in retirement savings each year and called for stricter rules on Wall Street brokers.

Jason Furman, chairman of Obama’s Council of Economic Advisers, drafted a Jan. 13 memo citing research that says some broker practices, such as boosting commissions with excessive trading, cost investors $8 billion to $17 billion a year. The document was circulated to senior aides and indicates the White House may support tighter oversight of brokers who handle retirement accounts.

The memo, obtained by Bloomberg News, makes the case for a Labor Department regulation that would impose a fiduciary duty on brokers handling retirement accounts, requiring them to act in their clients’ best interest. Under current rules, brokers are held to a ‘suitability’ standard, meaning they must reasonably believe their recommendation is right for a customer.

“Consumer protections for investment advice in the retail and small-plan markets are inadequate,” Furman wrote in the memo, also signed by Betsey Stevenson, another member of the economic council. “The current regulatory environment creates perverse incentives that ultimately cost savers billions of dollars a year.”

Wall Street has spent more than four years lobbying against the Labor rule. Led by firms like Morgan Stanley and Bank of America Corp., the industry has argued that costlier regulations would take away options for smaller investors, who would lose access to advice as well as investment choices.

‘Massive Shift’

A White House official said the document, titled “Draft Conflict of Interest Rule For Retirement Savings,” shouldn’t be seen as a new turn in the Labor Department’s rulemaking. That process, the official said, would include a comment period if the administration moves forward. The Labor Department last year indicated that its proposal could come as soon as this month.

A fiduciary duty on brokers would provide “meaningful protections” to investors, according to the memo.

The Labor Department has pressed to update the rules, which were issued in 1975. At that time, many workers had employer-controlled pensions and the 401(k) didn’t exist. Now, tens of millions of people have their savings in 401(k) plans and individual retirement accounts, known as IRAs, which together hold more than $11 trillion.

“Few foresaw the massive shift in retirement savings that would occur over the next 40 years,” Furman wrote.

The document says researchers’ estimates of up to $17 billion in investor losses are “quite conservative.” Investors lose 5% to 10% of their long-term savings due to conflicted advice, according to the memo.

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