Abandoning
the fiduciary rule was a mistake.
Ethan Schwartz has worked as an
investment manager and financial services executive for 21 years. He
was a special assistant to the deputy secretary of the Treasury in the Clinton
administration.
Last year, the Trump administration abandoned a
regulation designed to protect U.S. savers from conflicted investment advice.
Known as the fiduciary rule, it would have required more brokers and insurance
agents to disclose when they’re getting paid to steer people into certain
investments. It also would have banned the sale of certain retirement products
when they aren’t in savers’ “best interest.”
So did the rule’s demise benefit Americans by empowering them to
“make their own financial decisions,” as Trump indicated he wanted
to do? The evidence suggests not. Sales of potentially questionable investment
products have soared, and retirees stand to end up billions of dollars poorer.
One prime example: fixed-indexed annuities. Often aggressively
marketed and loaded with fine print, they promise participation in the stock
market’s upside with no risk of loss. Although some can be useful for tax and
insurance planning, when mis-sold they can amount to an unduly complex version
of a strategy that investors can replicate at much lower cost. Among their
attractions for insurance agents: high commissions and bonuses that have included beach
vacations and cruises.
Insurance agents’ behavior suggests some of them doubt that these
products always serve clients’ best interest. Sales of fixed-indexed annuities
plunged after the Labor Department issued its final version of the fiduciary
rule in April 2016. Predictably, sales recovered quickly after June 2018, when
the Trump administration allowed a court to vacate the rule with no pushback
from the Labor or Justice departments. In the last three months of 2018, sales
amounted to $19.5 billion, according to the Life Insurance Marketing
and Research Association. That’s up 40 percent from a year earlier.
A Boom in Questionable
Investments
Sales of fixed-indexed annuities rebounded after protections were
relaxed.
Source: Life Insurance Marketing and Research Association
In New York state, which has unilaterally adopted aspects of the
fiduciary rule, far fewer insurers sell such products.
How much do savers stand to lose? Consider one product that a
major insurance company marketed to me: a 10-year annuity linked to the S&P
500 Index. Based on this annuity’s formula and the price at which it was
offered, a client would have foregone on average an estimated $54,000 in profit per $100,000 invested
over any 10-year period going back to 1989. That’s compared with a simple
combination of U.S. Treasury bills and S&P 500 index funds that offers the
same downside protection as the annuity with less credit risk and more liquidity.
The marketing materials an agent sent me seemed to play on fear,
showing a potentially faulty comparison of the annuity’s returns to the loss a
pure stock position would have suffered during the 2008-09 crash. And the
materials did not highlight crucial information such as hefty withdrawal fees
and the insurance company’s right to reduce payouts.
Such products are just the tip of the iceberg. Every year insurers
come out with an array of new annuities employing “black box” strategies that
are all but impossible for outsiders to understand. One could be forgiven for
suspecting that some such strategies have been tweaked to make it difficult for
a lay person to accurately assess their return potential.
No current efforts to improve standards — including one by the
National Association of Insurance Commissioners –- come close to the
protections that the fiduciary rule would have provided. A strong form of the
rule should be revived and applied to all investment accounts, not just
retirement accounts. To be clear, there are upstanding insurers and agents who
sell indexed annuities only when appropriate. Proper regulation wouldn’t crimp
those sales, but it would prevent over-prescription of such products to people
whom they can harm.
This column does not necessarily reflect the opinion of the
editorial board or Bloomberg LP and its owners.
https://www.bloomberg.com/opinion/articles/2019-05-06/trump-could-cost-future-retirees-billions
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