May 31, 2011
Publishing with disclaimers
Clearly, the authors were aware that their study would be vulnerable to criticism. Roughly 6% of their paper (based on a count of words) was given over to a series of disclaimers regarding their data and methodology. These are too voluminous to reproduce in full here, but a full list can be found at the end of this article.
The inclusion of those disclaimers, no matter how frequent, does not give the authors the license to have published their flawed study. If the standards of academic research were relaxed to allow publication of papers that relied on such disclaimers, we would soon find journals filled with articles about newly discovered asset classes promising 30% risk-free annual returns.
I spoke with Lance Ritchlin, the publisher and editor of the Journal of Financial Planning. He assured me that this paper had been peer reviewed, but he could not say whether the reviewers had sought to verify the underlying data used in the study, as I did. On his decision to publish the paper, Ritchlin said, “If something is published, it doesn’t mean it’s right; just that it’s worth considering.”
When considering this study, don’t lose sight of the bigger picture. By the authors’ own admission, EIAs provide downside protection against market declines with limited upside potential in bull markets. That return profile will appeal to certain very risk-averse investors, particularly those who are indifferent to the risks of carrier default and surrender penalties. But the return profile of an EIA can be replicated, either with an 85/15 portfolio, as Reichenstein suggests, or with some other combination of Treasury securities and either index funds or options, as other authors have advocated. That leaves a very small universe within which EIAs are appropriate.
When determining if your clients fit into this slice of the market, I recommend you give this study little weight, if any.
In closing, I’ll add a disclaimer of my own: While I’ve tried to address the major problems with this research, I’ll bet astute readers can identify additional flaws in the study – or points of disagreement with our analysis of it. If you do, let us know.
Disclaimers contained in the authors’ study
- Our study is exploratory, because although it is based on actual contracts and actual crediting rates, our policy data set is neither randomly selected nor comprehensive based upon data provided by 15 EIA carriers.
- [The data in Table 1] are not intended to be a prediction of how index annuities will perform in the future, nor are the results intended to be representative of overall industry performance.
- There are several limitations with the data in Table 1. The main one is that they are derived from carriers that chose to participate and that chose the products for which they reported returns. This could have imparted some bias in returns, and may differ from what a larger, more random sample would have produced for the periods.
- [The annuity used for Figure 1] is not intended to be representative of anything except itself.
- And the data reflect results across a very small spectrum of time: only looking at 1997–2010, and then only at one day out of each year.
- These returns should not be viewed as representative. As mentioned earlier, the annualized range of returns in Table 1 is from annuity carriers that chose to submit their return data, and although overall a majority of index carriers did provide actual return data (reaching 83 percent of all carriers selling FIAs at one point), self-reporting bias may have resulted, skewing the returns higher than would be seen with a more comprehensive data set.
- We cannot say whether our data are representative of all EIAs, although we assembled the largest database of actual returns that has yet been used in a published study.
Note: In the paper, the authors referred to fixed indexed annuities (FIAs). We replaced that abbreviation with EIAs above. The terms are synonymous.
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