The Fiduciary Rule Was Great for Variable Annuity Buyers: Economists

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.

— Read Are 7% of Brokers Really Behaving Badly?, on ThinkAdvisor.

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