Bloomberg) — Labor Secretary Thomas Perez is trying to rally support for stricter broker rules as Wall Street lobbyists line up in opposition to the Obama administration's plan.
In a speech Friday to a group of consumer advocates, Perez said that one of his top priorities is to make brokers who manage retirement accounts put their clients' interest ahead of their own. He said current rules enable biased financial advice that jeopardizes workers' nest eggs.
Perez likened the situation with retirement savings to the sale of complex mortgages in the run-up to the housing market collapse.
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"This is a first cousin of what I saw in the mortgage space," Perez said at a Consumer Federation of America event in Washington. "Folks did not know they were victims because they went to someone they thought they trusted. It turned out the trust may have been misplaced."
Perez is battling a phalanx of industry lobbyists as he seeks to eliminate what the Labor Department calls conflicts of interest that cost investors billions of dollars annually. Labor's proposal would require brokers to put retirement savers' interests first, a standard known as fiduciary duty. It would apply to retirement accounts such as IRAs and 401(k)s, which now hold more than $11 trillion.
Perez said some brokers sell inappropriate investments to retirement savers with "compound fees and costs that can linger like a chronic illness." According to Obama administration economists, investors lose as much as $17 billion a year to inferior products and "backdoor fees."
Under current rules, brokers can sell any product that is "suitable," meaning it fits an investor's needs and tolerance for risk. White House officials said that compensation model and the suitability standard allow brokers to recommend products that net higher fees or commissions without yielding better returns for investors.
Wall Street groups and brokers say the rule will impose added costs that will prompt brokers to drop client accounts with less than $50,000 of assets, leaving those investors to manage their own savings. Those investors pay less under the current business model than they would if brokers were required to work under a fiduciary duty, the industry says.
Perez said his department has spoken to brokerage firms and other regulators including the Securities and Exchange Commission. He said the proposal won't ban commissions and that many investors would be better served by simpler products such as index funds.
"It is a false choice to suggest that the only way to continue the business of providing financial service advice to folks is the status quo," he said. "I categorically reject that."
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