Financial advisors are being put in a very difficult position when clients are faced with buyout offers on their variable annuities that have guaranteed payments, experts in the field say.
A few insurance companies have announced their intention of offering holders of variable annuities with guaranteed payments a buyout for a lump sum and others say they are considering it.
But, unless a financial advisor has an advanced degree in finance and economics, it will be extremely difficult for the advisor to offer sound advice on whether to take the offer.
"It will be impossible to offer any advice based on sound analytical knowledge because advisors are being faced with a new situation," says Moshe Milevsky, a finance professor at York University in Toronto who studies annuities.
Policy holders and their advisors thought they would be faced with the question of when to start to take payments from policies that offered a guaranteed minimum life benefit. Now they are being asked whether they want to take a lump sum buyout to terminate the policy.
"Advisors cannot just throw up their hands and say they don't know," says Glenn S. Daily, a fee-only insurance consultant in New York City, "but they have no way of offering conscientious advice that will stand."
Daily says there are too many questions that have been left open by the insurance companies to know what the correct action might be. For instance, can a policy holder agree to move to riskier stocks if he wants to retain the policy? Or if he wants out, what is the relationship between the economic valuation of the policy and the market value?
"Not knowing the answers puts the financial advisor in a difficult position," he says.
Some other companies have announced their intentions to offer buyouts for variable annuities with guaranteed minimum payouts, some of which were set as high as 7% before the 2008 crisis, including. Hartford Financial Services Group Inc.
The policies were written when the stock market was at the peak of a five-year rally and interest rates were high. That has all changed now and the policies are a drag on the companies' revenues. Paying out lump-sum amounts now may be costly, but it would be cheaper than honoring the policies down the road, says Milevsky.
"I have sympathy for the advisor who only has a few clients with these policies, because it is a steep learning curve to determine what the client should do, and the advisor is not going to be compensated for the time he puts into this," he says. "For someone with a lot of clients, they are going to have to bring themselves up to speed on the issue."