While the thought of being able to guarantee income is enticing, there is as much as an additional 50 to 60 basis points charge for such a benefit, which can bring the overall cost of a variable annuity into the 3% range. And that is before investment subaccount expenses are added in. Clients who don't need to generate income may not be a good fit for an exchange.

That's why it's critical for advisors to zero in on the client's original and current goals for owning the product. "If the original intent is legacy planning, and then we get an application for a transfer that says the client needs to generate a certain dollar benefit every month, we'll request a new investor profile that states clearly what has changed," says Commonwealth's Maher. "Circumstances can change, but we just want the client to understand that what they're saying now is different from what they said a few years back."

Once a clear understanding of a client's present goals is established, and a determination made that there is a possible advantage to a variable annuity exchange, advisors can begin to look carefully at the real costs and benefits of such a transfer. A sound analysis should include what the client is paying, what they're leaving behind and what they're gaining. Compliance experts agree that there should be multiple reasons and benefits for doing an exchange because of the heady costs involved in cashing in one variable annuity for another.

Commonwealth flags any exchange that costs a client 3% or more in a surrender charge. The compliance department then carefully reviews such applications and can choose to reject them or ask the advisor or planner for additional justification.

Telling a client it will cost him, say, 2% in surrender charges to do an exchange, will not free an advisor from the glare of regulators. For example, Commonwealth often requires advisors to get clients to sign a letter of understanding that clearly lays out the actual dollar amounts they'll pay to do the exchange.

Such a client letter might say something like: "I understand it will cost me $12,000 in early surrender charges and a $125,000 life insurance policy to exchange my existing variable annuity for a new one."

At times an advisor may believe that an exchange may actually save a client money, but that is not always the outcome, especially if there are additional charges for guarantee riders. Careful documentation should be done to evaluate all immediate and long-term costs, says Michelle Heyne-Wyrick, a partner in the compliance firm of BD/IA Complete LLC in Seattle.

As part of overall cost disclosure, it's also smart to disclose advisor compensation. And saying no to clients should always be a consideration, too, the consultant maintains. "If the rep or advisor believes an exchange is not a good idea, it's crucial to say so," Heyne-Wyrick says. "You can even say something like, 'I'll make 4% on this transaction, but I think there are major downsides for you.' It's important for planners to be upfront about compensation disclosure. So many problems come from planners' embarrassment over what they make."

The area of life insurance, especially newer guaranteed insurance benefits, can also prove problematic when it comes to making a convincing case for a pricey exchange. Why? Sometimes clients can be persuaded that guaranteed life insurance is a great buy, when it fact they don't need it or may be able to purchase the insurance cheaper outside of the variable annuity.

If a client really does want insurance to protect heirs, is a guaranteed death benefit rider-which is a bit of a misnomer at best-really the way to go? On newer policies, the guarantee provides a death benefit that is the greater of what a policy is worth at death or, if the market is flat or bearish, what was invested compounded at an annual rate. Such calculations add a definitive air of uncertainty if the insurance analysis a planner conducts shows a client has the need for a certain amount of life insurance.