Conflicting Interests and the Effect of Fiduciary Duty — Evidence from Variable Annuities

Mark L. Egan, Shan Ge and Johnny Tang

No 27577, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine the drivers of variable annuity sales and the impact of a proposed regulatory change. Variable annuities are popular retirement products with over $2 trillion in assets in the United States. Insurers typically pay brokers a commission for selling variable annuities that ranges from 0% to over 10% of investors’ premium payments. Brokers earn higher commissions for selling inferior annuities, in terms of higher expenses and more ex-post complaints. Our results indicate that variable annuity sales are roughly four times as sensitive to brokers’ financial interests as to investors’. To help limit conflicts of interest, the Department of Labor proposed a rule in 2016 that would hold brokers to a fiduciary standard when dealing with retirement accounts. We find that after the proposed fiduciary rule, sales of high-expense variable annuities fell by 52% as sales became more sensitive to expenses and insurers increased the relative availability of low-expense products. Based on our structural model estimates, investor welfare improved as a result of the fiduciary rule under conservative assumptions.

JEL-codes: D18 D22 G22 G24 G28 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-ore
Note: CF
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Citations: View citations in EconPapers (3)

Published as Mark Egan & Shan Ge & Johnny Tang & Ralph Koijen, 2022. "Conflicting Interests and the Effect of Fiduciary Duty: Evidence from Variable Annuities," The Review of Financial Studies, vol 35(12), pages 5334-5386.

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