What Is Behind All Those VA Guarantees?

Do people on the distribution side of the house need to know, too? That depends, says independent VA marketing consultant Harvey Hirsch, New York City.

Broker-dealers need to know "in spades" what makes for successful guarantees (and other VA features), Hirsch maintains. "The B-Ds are the gatekeepers. They need to be sure the products going through their systems (and offered to customers) are the right ones for the customers" and have been analyzed for strength and performance.

The B-Ds bear "gigantic risk" in performing this duty, both reputation and fiduciary risk, he continues. So they need to conduct independent due diligence on the products they offer. This must be ongoing, not once every 5 years, and it must be in detail. "They just can't take some provider's word for it, that the features (like guarantees) will stand the test of time," he says.

The B-Ds should even be willing not to offer a hot new guarantee or other VA feature if they can't understand it or be assured it is being properly managed, Hirsch adds.

What about the reps and other financial advisors? "They need to understand that due diligence on the guarantees and the product has been thoroughly done," says Hirsch, "and they need to know that their B-D believes the products will stand the test of time." The specifics of how particular issuing companies manage their guarantees could be interesting to a rep, but what is critical is for the rep to know that the B-D has examined this and other areas carefully, he indicates.

What do clients need to know about the guarantees and their management? "The wise client might well ask, 'How do I know that this guarantee will perform as you say?'" says Hirsch. "If that happens, the rep is not going to talk about stochastic modeling, financial engineering and hedging. Instead, the rep will point to the rigorous due diligence done by the B-D, the rating of the insurance company that backs the guarantee, the brand of the company, and related factors."

Often, if the issuing company is well known and highly regarded, and if the rep has established trust with the client, that will be enough to satisfy the customer, adds Hirsch. But if the company is not well known and highly regarded, the rep will have to work harder to address the concerns.

Even though the need to know varies by position on the distribution chain, Hirsch stresses that it is important for industry professionals to be informed in this area. Product features like guarantees are not things that clients think about until they need the money, he notes. So somebody else needs to do the thinking for them, to be sure the features are managed properly.

What's important is not only that the money is available, but that it will be available when needed, he adds. "It is also important that the expenses for the guarantees are not so large that they nibble away at the growth in the contract."