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 the brokers.

Jason Furman, chairman of Obama’s Council of Economic Advisers, drafted a Jan. 13 memo indicating the White House may support tighter oversight of brokers who handle retirement accounts. The document, obtained by Bloomberg News, was circulated to senior White House aides.

The memo 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 successfully 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.

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 hold 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 memo cites research showing that some practices, such as boosting commissions with excessive trading, cost investors $8 billion to $17 billion a year. The document says the estimate is “quite conservative” and argues investors lose five to 10 percent of their long-term savings due to conflicted advice.

Clients’ Detriment

“Academic research has clearly established that conflicts of interest affect financial advisors’ behavior and that advisors often act opportunistically to the detriment of their clients,” the memo says. That includes the practice of brokers receiving payments for selling certain mutual funds.

Brokers generally charge commissions based on trading activity, which they have said is usually less costly than fees that are based on the size of an account. It would be more difficult to keep those commission-based accounts, the industry has said, if the fiduciary standard were imposed.

To compensate for additional paperwork requirements and an increased potential for lawsuits, the industry has argued that it would be forced to move investors to accounts that charge a flat fee. Savers with assets under $50,000 would probably be dropped, forcing investors to handle their own savings, industry groups have said.

Cause Concerns

The Securities Industry and Financial Markets Association, Wall Street’s largest trade group, declined to comment specifically about the memo. The group has previously said that opposing the Labor Department plan is one of its top priorities in Washington this year.

“Any signal that the DOL proposal is moving forward would cause us concern,” Andy Blocker, a Sifma lobbyist, said in a statement. “We have repeatedly said that action by the DOL runs the risk of increasing costs and decreasing access to education for the everyday consumer.”

The Labor Department’s draft rule won’t ban sales commissions, Furman’s memo says. The proposal will be a “middle ground” that requires brokers to guard against conflicts and avoid “certain self-dealing transactions,” the memo said.