Moshe Milevsky: What Investors Did Better 300 Years Ago

How curious to learn that annuities had their start with religious groups in 18th century Scotland. But leave it to Moshe A. Milevsky, finance professor at York University in Toronto, to bring that to light in a 286-page book about the journey.

Oddly enough, consumers in the 1700s were comparatively more financially literate than consumers today, the professor writes.

“There was a greater awareness that if they didn’t learn about financial things, they wouldn’t do well,” says Milevsky in an interview with ThinkAdvisor. 

For example, such knowledge prompted them to figure out how much to contribute to their pension plans.

“Most people didn’t select the default. They thought, “I may want to contribute more, or I’d rather contribute less,” he argues.

His new book has an imposing, if comprehensive title: “The Religious Roots of Longevity Sharing: The Genesis of Annuity Funds in the Scottish Enlightenment and the Path to Modern Pension Management.”

It is indeed a deep dive into history aimed at scholars and other readers interested in finance, insurance, pensions and religion, he says.

Astute advisors can pick up some illuminating facts to use in annuity discussions with clients.

In the interview, Milevsky also comments on the impact of the recent interest rate cut on annuity sales and why annuities aren’t making more headway into the RIA channel.

Here are highlights of our conversation:

THINKADVISOR: Why should financial advisors care about the religious roots of longevity sharing?

MOSHE MILEVSKY: This book isn’t written for the typical advisor trying to figure out who their next prospect will be. It delves deeply into the history of longevity and annuities and risk pooling.  

There’s a whole group of advisors who understand that in order to engage with clients, they have to have a level of knowledge that’s deeper than just the surface. If a client asks how long annuities have been around, you’ve got to be able to handle that question. 

The answer is 400 years, before stocks and bonds. So they seem to work.

Consumers of the 18th century were relatively more financially literate than people in the 21st century, you write. Why?

There was a greater awareness that if they didn’t learn about financial things, they wouldn’t do well.  

Today, with 401(k) and 403(b) plans, [participants] just default to whatever’s on the menu. In the 18th century, when [pension] plans first became available, most people didn’t select the default. 

They said, “I may want to contribute more, or I’d rather contribute less. I want to think about this.”

You make the point that in the 18th century, wealthy people would benefit more from pensions because they lived longer. How does that relate to the current day?

That’s the challenge and where history becomes highly relevant. When you save to buy an annuity or a pension [product] you’re pooling together, but who’s going to be the winners and the losers we don’t know till the very end.  

However, now we’re starting to know those in advance; and that’s going to cause these plans to break down. That’s my prediction.

Why will they break down?

More people will say, “This annuity assumes I’m going to live a very long time. But I don’t think so because I did a genetic test, and I checked my biological age. It will turn out that I’ll be subsidizing someone else. So I don’t want this sort of plan.” 

How does that differ from folks’ attitude in the 18th century?

They felt a religious kinship. They were part of the same faith. They went to the same church or temple. So they were cool with subsidizing someone else because that was part of their faith.

Once you take the faith away, people don’t want to subsidize “some stranger living on the other side of town.”

That’s where this will go if we continue to focus on pooling. 

Are there any new trends in annuities?

In-plan annuities are a hot topic. The Secure 2.0 Act put these front and center for plan providers and sponsors. 

If you’re managing a 401(k) plan, you’re trying to figure out what to put on the menu and starting to think about [including] an annuity, or maybe you’ve already done that. 

Another trend is the phenomenal success of RILAs [registered index-linked annuities], where you can carve out what you’re willing to lose and how much you’d like on the upside. They’re becoming very popular.

How could the cut in interest rates impact annuity sales?

People will have to adjust and say, “I might have to take a bit more risk now because annuities aren’t paying out as much as I wanted.”

Should an investor who has a $1 million portfolio of stocks and bonds buy an annuity?

It depends on whether you have a preexisting [corporate] pension, and it’s relative to income needs.

Also, it depends on your personality type, risk aversion and your other sources of income. 

[Knowing] your personality type is where an advisor comes in. They should know about all the different types.

So they may say, for example, “In your case, maybe a registered accumulation product for a few years would be good, and then we’ll see.”

What about someone who’s ready to retire and doesn’t have a corporate pension? Everything they’ve put away is in a 401(k) or an IRA. And they have no guaranteed source of income except their $2,000 monthly Social Security check. 

They might go out and buy an annuity because they would be very risk averse and very loss averse.

What type of annuity should they buy?

There’s a huge universe. If they need income right away because they’re already retired, then a single premium income annuity would work.

If they want to retire in five or 10 years, maybe a deferred income annuity would be for them. Do they want some exposure to the stock market? Maybe a variable annuity would work. 

Are they willing to handle a little loss  — like 5%? Perhaps a RILA in that case.

Are there any new annuity products have that just debuted?

It’s not brand-new, but the tontine pool is slowly coming online. There are a couple of U.S. companies that are now doing these.

The last time we spoke, you mentioned a tontine retirement decumulation product that was just being introduced. Please talk about that.

It’s been available for two-and-a-half years in Canada from Guardian Capital. I have a part-time gig with them, where I come down from my university ivory tower and hang out. 

I help them design retirement income products and decumulation products. It’s fun to take some of these theoretical ideas and try to make them practical.

Are registered investment advisors becoming more interested in annuities?

Relatively speaking, yes: It used to be that the percentage of RIAs that would represent them was zero; now there are some. There’s still a lot of work to be done.

Annuities aren’t the way RIAs think. They didn’t build their businesses that way. They still have to be convinced that there’s value in annuities.

One of the things that has to change is compensation. RIAs won’t go with commission products. Annuities have to change to either no-load or fee-based.

Some companies [like Fidelity and Vanguard] are doing that.