When do they make sense, and when do they signal regulatory suicide?

With the creation of one-shot wrinkle reducers like Botox, battery-operated automobiles and cloned humans, can a world where there is no need to replace variable annuities be far off?

That's a hard call even today, after four years in which regulators have been on the warpath against those brokers whom they say replace variable annuities unnecessarily, costing each investor thousands or more in new commissions, lost benefits and annual fees.

Proponents of the product, which combines both a life insurance and investment component, say the new bells and whistles like guaranteed income and death benefits that are the hallmarks of the new generation of products mean there will be no compelling reason to replace variable annuities in the future. "If your principal is protected, there's no need to replace the product," says Carly P. Maher, manager of variable annuity products at Commonwealth Financial Network in Waltham, Mass. "I think this will change the industry as a whole."

But critics and observers are less convinced, and counter that the main motivation for brokers to switch client variable annuities will be the same as it has been for more than a decade-boosting their own sizeable commissions.

So where does that leave planners and advisors who are being approached by clients, many of them disenchanted with the former generation of annuities they were sold sans the income and expanded life insurance benefits now available? These features, and the painful memory of the bear market, are compelling clients to consider trading in their old contracts for new ones. They're looking for "guaranteed" features to protect them, and at least part of their retirement nest egg, from the next possible round of market losses.

In fact, newer bells and whistles caused variable annuities sales to increase 10% last year, to $124 billion. Companies are also reporting that advisors who never sold variable annuities before are starting to do so. The reason? Their goal is to provide some income guarantees to clients who are demanding it.

Enticing product features and client demands notwithstanding, regulators have come down particularly hard on variable annuities switches that don't benefit anyone but the selling broker or planner. The National Association of Securities Dealers and the Securities and Exchange Commission have conducted more than 75 investigations, resulting in broker-dealers, reps and advisors paying hundreds of millions of dollars in fines and commission restitution orders. As a result, it's difficult to be too safe when it comes to justifying and documenting variable annuities exchanges. Such regulatory scrutiny also makes it critical for clients to understand all of the ramifications of a variable annuity switch (also called a 1035 exchange, after the section of the Internal Revenue Service code that stipulates such exchanges do not trigger income taxes).

So how do you ensure that you don't cross the line regulators have drawn in the sand when clients come calling and want to replace their variable annuity? "That's a dandy question, and more planners need to ask it," says John L. Olsen, principal of Olsen Financial Group in St. Louis County, Mo.

The first step in any replacement analysis-and a demonstrable analysis is needed to fully understand and protect client interests-should be more client-oriented than product-centered, he says. "What is the client trying to achieve through an exchange?" Olsen asks. "If they tell you they hate their annuity because it lost money in the past few years, it's important to show them they would have lost money in mutual funds, too."

Once investors understand this point, it's important to see if their existing policy accomplishes their goals or can be modified to do so. Sometimes companies allow riders to be added, even guaranteed income or death benefit riders, in order to keep contracts in force. In other instances, clients may be unhappy with their investment choices but not aware that they can accomplish some or all of their goals by switching funds in their existing annuity's subaccounts. Better investment choice alone is a dicey justification for doing a variable annuity exchange and not likely to sit well with regulators, compliance consultants say.

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