Annuities

Saw this comment posted on the Free Exchange blog:

In my own line of work (I design annuity products), both federal and state regulators have decided to use a heavy hand to guide individuals into the products they consider correct; they want consumers to buy more mutual funds instead of annuities.

The result, at my company at least, is that our clients and financial advisors have to do a substantial amount of extra paperwork for the client to buy any securities products from us, especially when the purchase is being funded by the sale of another securities product. The extra paperwork is supposed to show the client how much better a deal a mutual fund would be than an annuity. The problem is that our annuities have features that our mutual funds don't so the client can usually be convinced to pay the extra expenses of the annuity and the "suitability" of the sale can almost always be demonstrated if the client is electing one of those features (who couldn't use some guaranteed income during retirement after all).

Since we compensate more for annuity sales (this is necessary because the annuity is more complicated than a mutual fund and the sale thus requires more effort), but the additional paperwork hits both mutual funds and annuities equally, the result of the extra regulatory measures is to further tilt the scales towards annuities in the advisors' reward/effort calculus. This has actually shifted our mix of business away from mutual funds and towards annuities, the exact opposite effect intended by the regulators. In addition, the extra cost of regulatory compliance is putting upward pressure on the price of the annutiies. At least we can all sleep well knowing the sales were suitable.

Shouldn't come as a huge surprise. The impact of regulations often don't turn out the way their designers intended.