Labor secretary defends standards for financial advisers

Labor Secretary Thomas Perez is defending his agency’s regulatory proposals for financial advisers amid an onslaught of criticism from the business community.

In a Washington speech on Tuesday, Perez assailed the current system as “anachronistic” and argued that the administration’s proposals amount to a “common sense,” “middle-ground” approach that’s rooted in President Reagan’s adage, “trust — but verify.”

The administration is pushing for new regulations — known as fiduciary standards — for financial advisers. The regulations would require financial advisers to disclose to their clients whether they earn money from financial institutions for selling financial advice packages to their clients.

“The underlying principle is very simple and rooted in basic common sense: If you want to give financial advice, you have to put your clients’ best interests first, and not your own,” Perez said.

But the business community and moderate Democrats have fought back hard, arguing that the new regulations would so radically reshape the entire industry that they would raise costs on low-income Americans who arguably are already underserved in the financial advice field.

A hearing is tentatively scheduled for August on the proposals.

Perez said that, “in many cases, [financial advisers’] only obligation is to offer you a suitable investment option, not an option in your best interest.”

“There’s a big difference between something that is suitable and something that is in the client’s best interest,” Perez said. “If you’re an adviser operating under a suitability standard, once you narrow the options down to those that are suitable, you can recommend the one that is most lucrative for you — even though that might mean a lower return for the client. Under a best interest standard, you would need to choose the one that is best for the client.”

Powerful financial services groups like Securities Industry and Financial Markets Association (SIFMA), the U.S. Chamber of Commerce and the Financial Services Roundtable have all criticized the proposal.