Just in case you thought the sales standards fight was cool
enough that you could roast corn on the embers...
Mark Egan, Shan Ge and Johnny Tang have gone
and poured grain alcohol on the annuity sales standards conflagration.
The fight blazed ferociously in 2016 and 2017,
as the supporters and opponents of the U.S. Department of Labor’s original,
Obama-era effort battled with policy light sabers.
The fight seems to have cooled to a moderate
level this year, with state insurance regulators and Trump’s DOL converging on
support for Regulation Best Interest, the work of Trump’s U.S. Securities and
Exchange Commission.
But the Democratic Party has included Reg BI repeal in
its platform.
Now three economists — Egan, who’s a faculty
member at the Harvard Business School; Ge, who’s at New York University’s
Kaufman Management Center; and Tang, who’s at Harvard’s Littauer Center —
have come out with a working paper saying the original DOL fiduciary rule
effort cut sales of high-expense variable annuities by 52%.
“The DOL fiduciary rule was effective in
shifting the incentives of financial brokers and insurers and resulted in a 10%
decline in average expenses paid by investors,” the economists write in the
working paper, which has been published, behind a paywall, on the website of
the National Bureau of Economic Review.
A working paper is a paper that has not yet
been through a full peer review process.
Here are seven other things the economists say
about the U.S. individual variable annuity market, and the sales standards
fight, in their paper.
1. Variable annuities
as important retirement savings vehicles.
The economists call variable annuities
“one of the most popular retirement products in the United States” and note
that, as of 2018, U.S. households had accumulated $2.2 trillion in assets in
variable annuity accounts.
2. Variable annuity
sales seem to be are more sensitive to incentives for brokers than to
incentives for investors.
The economists estimate that, all other things
being equal, variable annuities in the top 15% in terms of commissions will
have sales that are 17% higher than variable annuities with average commission
levels.
3. Variable annuity
sales commissions vary widely.
The economists said they saw commissions
ranging from 0% to 16% of the principal invested, with a mean of 6.09%.
The contracts in about the top 15% in terms of
commissions had a commission of about 8.4%.
A 1-percentage-point increase in expense
ratios was correlated with a 1.61-percentage-point increase in broker
commissions.
Because of that correlation, “on average,
brokers are incentivized to sell higher-expense products and products with
worse investment options, as measured by the variety and performance of the
investment options,” the economists contend.
4. The original DOL
fiduciary rule effort affect sales mainly of what the economists see as
overpriced annuities.
Overall variable annuity sales fell about 19%
after the rule was issued, in 2016, but the drop was due mainly to a decrease
in sales of high-expense variable annuities, the economists write.
“The results suggest that, in response to the
proposal of the rule, brokers began complying with the rule by placing greater
weight on investor interests,” the economists write. “We also find that
insurers responded to the rule by increasing the relative availability of
low-expense products available for sale. Our findings are consistent with
anecdotal evidence from annual reports of brokerage firms and insurers, where
they reported changing their business practices in anticipation of the rule.”
5. The original DOL
fiduciary rule had the effect of increasing variable annuity holders’
risk-adjusted returns.
The economists say that, as early as 2015,
when the DOL fiduciary rule was proposed, but not finalized, variable annuity
buyers were moving toward buying contracts with higher investment returns and
expense levels that were 0.2 percentage points lower.
Variable annuity buyers ended up with
risk-adjusted returns that were 0.86 percentage points higher than what the
returns would have been without the DOL fiduciary rule effort, the economists
say.
The shift also increased the market share of
non-variable indexed annuities, to 47%, from 27%, and that also increased
consumers’ welfare, because typical consumers prefer non-variable indexed
annuities to variable annuities, the economists write.
6. Insurers are
already acting as if they expect the Obama-era fiduciary rule to return.
The economists say that, so far, insurers seem
to have kept the changes they made in response to the Obama-era fiduciary rule
in place, even though the Trump administration let the rule die in court, in
2018.
7. A fiduciary rule
that’s enforced might be more powerful than the actual Obama-era rule.
The economists note that the Obama-era
fiduciary rule had a powerful, obvious effect even though enforcement of
the final rule was limited and short-lived.
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