Mark Cortazzo knows annuities. As senior partner at the Parsippany, N.J.-based MACRO Consulting Group, a firm he launched in 1992 that now has nearly $1 billion in assets under management, Cortazzo has been on Barron's list of "America's Top Financial Advisors" for the past six years running, among other accolades. His research into the nuances of variable annuities led to a project called Annuity Review, which services some $500 million in VA assets.

But with national VA sales mostly flat in recent years, and their fixed indexed counterparts gaining ground, is the VA story over? "No," replies the CFP and Rider University alumnus. "The securities regulators have cracked down in their oversight of VA brokers, while indexed annuities are not as thoroughly regulated. That's a big difference. You don't need a securities license to sell an indexed annuity."

The sales trend is also compensation-driven, he adds. VA brokers typically receive a percentage of each account's assets annually -- a 1 percent annual trailing commission -- instead of the large upfront commissions they once did. That's not true with many indexed annuities, where brokers make their full commission on the day of the sale. What happens afterward doesn't affect them. "If they truly think it's a good long-term investment, they should want to get an ongoing commission from it," he says.  

Cortazzo further observes that indexed annuities are often inaccurately promoted as an alternative to equities. "But in reality, expectations for them should be more in line with bonds," he says. "They may be tied to the equity markets, but the way they do the averaging and cap the upside really limits potential gains."

Yet it's also true, he acknowledges, that VA fees have escalated lately and guarantees have become less enticing. Blame low interest rates, he says. "The cost of hedging risk has risen in this low interest-rate environment," he explains. "Because they're not earning as much interest as they used to, the insurance companies need to charge customers more. But if and when rates come back, VAs could become more attractive."

VA expenses, he says, are also noticeable. They are plainly disclosed and debited from each account, unlike with some indexed annuities in which expenses are "built into the product in such a way that you don't get as clear a picture," he says.

What advisors and their clients need to understand most about VAs is that they're a form of protection, Cortazzo insists, and protection is worth paying for. "They provide an absolute income guarantee," he says. "Even a balanced portfolio of stocks and bonds, which is less risky than an all-equity portfolio and cheaper than a variable annuity, can fail if the client draws money from it on a regular basis. With a variable annuity, the income distribution is guaranteed no matter how the market fares."

As with any insurance policy, you're buying protection against events that are unlikely to occur, he notes, but if they did would be financially devastating. "If they had a high likelihood of occurring, you'd be unable to get protection anyway," he points out. VAs enable people to transfer that risk. "You're paying someone to take on the risk for you," he says.

As for advisors who discourage clients from considering annuities, he asks, "Would those advisors be willing to guarantee their clients' future income stream if the market doesn't do well and the clients' portfolios run out of money? Of course not!"

To reject VAs because they "charge too much for protection that most clients will never need" is tantamount to saying "get rid of your homeowner's insurance and other policies," says Cortazzo. "If advisors gave that advice, they'd lose their licenses."

He concedes, however, that VAs aren't for everyone. There are clients who have so much in assets and so much discretionary spending that they can, in effect, self-insure against a cash-flow disaster. "They can always reduce their travel or sell their second home or whatever," he says. "But for others, they are an effective tool."

Admittedly, the industry has had its missteps. Once upon a time, VAs were underpriced, Cortazzo says. Their fees now are more appropriate, notwithstanding a few bad apples. "In this environment, with high market volatility and low interest rates, there aren't a lot of exciting developments that have substance," he points out. But that doesn't stop some providers from "spinning new products to make them sound exciting and sexy."

One example he's cautious about are "riders that offer richer current income guarantees that drop by as much as half if the principal of the account runs dry," he says. "To me that's a product that's trying to be cute and presents itself as doing more than it can."

Advisors, he warns, must help their clients understand the limits of these guarantees.