President Barack Obama on Monday proposed tougher regulations on investment brokers who handle retirement funds, saying it is time to curb hidden fees, "back-door" payments and conflicts of interest that eat into middle-class Americans' savings.
The proposal would have broad ramifications for Baltimore's financial services industry, including global money manager T. Rowe Price and a host of boutique investment advisory firms that manage billions of dollars on behalf of clients.
Obama unveiled the proposed rules — a revival of an effort quashed amid industry opposition four years ago — as part of a renewed focus on a populist economic message. Standing with retirees and consumer advocates, he dished tough talk for financial advisers who are "bilking" clients and selling "snake oil."
"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," he said at AARP headquarters.
Leonard Raskin, president and CEO of Hunt Valley-based Wealth Advocacy Partners, hailed the rules as "excellent" for both consumers and the advisory community. But he said others in the financial world wouldn't welcome the proposal.
"I don't know if anyone would admit it to you, but I bet a lot of my brethren would not think it excellent and they'll fight it at all costs," Raskin said.
The proposal would require some financial advisers 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 client's interests ahead of other factors, such as their own compensation or company profits.
The aim is to crack down on advisers who steer investors to products that provide hidden payments or generate higher fees, not necessarily those that provide the best return.
Advisers are now 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 contends that conflicts of interest cost savers millions. A report released Monday by the Council of Economic Advisers 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 and say the change to compensation structure would undermine their business model, making professional guidance more expensive and out-of-reach for average investors.
"Middle- and lower-market investors would have a hard time finding wealth managers willing to work with them, and they would be left without any professional guidance to secure their financial future," said Jules Gaudreau, president-elect of the National Association of Insurance and Financial Advisors.
Raskin said that the proposed rules put "a much greater burden on the adviser" and that some are concerned the bar to proving a broker acted in the client's best interest could be high. "There's a lot of fear of what 'fiduciary' would mean," he said.
The new standard could be particularly tricky for some advisers, he said, such as those working for investment firms who are rewarded by their employers for pushing clients to buy that firm's funds. If they could no longer push those products, it would upend the way advisers make a living.
"To be forced to serve two masters, that's impossible," Raskin said.
Mark Stevens, an adviser with investment management firm Snowden Lane Partners' Baltimore-area office, said his business always discloses annual percentage fees to clients up front, and that the proposed rules would primarily affect advisers working off commissions.
"We've always felt that transparency would be the best way of doing business," Stevens said. The government is "trying to protect people from these rogue folks. They want to make sure that fees are disclosed. To me, that's common sense and the fact that they have to do it, that's a shame.
Baltimore-based money management firms Legg Mason and T. Rowe Price declined to comment. While Legg no longer employs financial advisers, T. Rowe Price does offer retirement planning and brokerage services.
The Department of Labor proposed similar regulations in 2010, when industry pushback and criticism from lawmakers in both parties scuttled the plan. Opponents argued that 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. Although they did not detail the exemptions, which are certain to be debated during the rule-making process, officials maintained that the new rules would not prohibit revenue-sharing or commissions, or dictate how firms pay their advisers.
The White House said the new higher standards would not apply to advisers providing "general education" about employer-sponsored retirement plans and IRAs.
The president, however, sounded ready to take on another fight — rather than make more concessions. Unlike most of his new economic agenda, which includes tax increases for top earners and credits for low- and middle-class taxpayers, he does not need congressional approval to move ahead with the regulations.
Paul Schott Stevens, president and CEO of the Investment Company Institute, said the national association for investment companies would review the proposed rules and cautioned against "overheated rhetoric."
"It is vital that any proposed rules be carefully tailored to ensure that employers and savers still have access to that support and service," he said. "Achieving the goal of thoughtful and balanced regulation is never easy, and regulators must reply upon data and facts."
Raskin predicted that if the federal government succeeds in applying the rules to the retirement side of investment management, the fiduciary standard could be applied to other realms of wealth management.
"There's a huge lobby to stop this," Raskin said. "They're going to keep fighting this as long as they can."
Obama cast some of the financial industry's complaints as overblown. Rules governing retirement investing are decades old and need updating, he said.
Input from Wall Street will be welcome during the process of writing a final version of the regulations, he said, but "what I won't accept is the notion that there's nothing we can do."
"These industry doomsday predictions have not come true in other countries that have taken even more aggressive action on this issue than we're proposing," Obama said. "And if your business model rests on taking advantage, bilking hardworking Americans out of their retirement money, then you shouldn't be in business."
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 announcement comes as Republicans are preparing to outline their top economic proposals in a budget. White House officials say the president will try to draw a stark contrast in the coming weeks by making announcements about proposals they say will raise wages, make college more affordable and protect consumers.