“If only those assets had been protected by some kind of guarantee…” Such a lament might not be nearly as common had assets resided in a hybrid managed account with an insurance guarantee.
Products with income and withdrawal benefits, such as variable annuities, were gaining popularity even before the market tanked. And their appeal has only grown with the deepening of the financial crisis. In response, firms that design managed-money instruments are packaging managed accounts with optional insurance guarantees that protect against downside risk.
The guarantee is structured much like a VA guaranteed withdrawal benefit. Underpinning it is an agreement between the asset manager and an insurance carrier, whereby the insurer agrees to underwrite the guaranteed income feature provided the asset manager adheres to a prescribed asset allocation program.
The hybrid is “a nice variation” on the conventional managed account, says Robert Ellis of Celent. “However, the ability of insurance companies to actually make good on their guarantees is now also in question.”
Generally the guarantees are designed to provide a 5 percent lifetime income after age 65, plus a joint life income option. Typically ETFs and mutual funds are used to underpin the guarantee, according to FRC. To sell it, advisors generally must have a valid insurance license.
One advantage of the guarantee is that investors can drop or add it anytime. However, as Ellis notes, cost can be an issue, with contract-holders on the hook for investment fees, advisor fees and insurance fees, which today are the big unknown.
These hybrid instruments come with significant tax and regulatory uncertainty. Still, says FRC, such products represent “a tremendous opportunity,” particularly as a means to “fill the gap between mutual funds and the guarantees offered by VA products.”