Investment Corp

The Geller Group LLC, a New York retirement plan administrator and registered investment adviser, has confirmed in internal memoranda that it is being investigated by the Labor Department.

“The Department of Labor began an investigation of Geller Advisory Group in December to examine our third-party plan administrator and registered investment advisory business,” James English, head of the firm’s client relationship management unit, wrote to his colleagues this month.

“We responded to a request for information in January. We are examined by regulators from time to time as is common in our industry. We expect no adverse consequences from the investigation,” Mr. English wrote.

As previously reported, people close to the investigation, as well as former employees, said that the government is probing whether Geller had a conflict of interest by recommending to its pension plan clients that they use an auditor in which it allegedly held an undisclosed interest. The auditor, Caesar & Associates, worked out of Geller’s Midtown Manhattan headquarters, its employees for several years received checks directly from Geller, and Geller officials reportedly signed off on some of the audits.

Sheldon Geller, who began the company with his former father-in-law about 25 years ago and sold a majority interest in the firm in 2006 to Focus Financial Partners LLC, said in an interview this month that he was unaware of an investigation of his firm.

On Feb. 9, in response to an InvestmentNews article reporting the investigation, Mr. Geller wrote in an internal memo that the firm’s lawyer had spoken with the Labor Department the previous day and learned that she was investigating “the way in which our clients purchase mutual funds for the retirement plans.”

At least three investigators are working on probes related to Geller, including one who is with the Labor Department’s Office of Labor Racketeering and Fraud, sources said.

In his memo, Mr. Geller noted that Caesar & Associates previously has been reviewed by the Labor Department, without commenting on the results. Mr. Caesar said that the Labor Department’s Employee Benefits Security Administration referred his case to the American Institute of Certified Public Accountants’ ethics division and that he is contesting the EBSA’s conclusions.

Mr. Geller’s memo said that the EBSA investigator told his firm’s lawyer that the Labor Department was the only “agency involved in the investigation.”

Several sources with knowledge of the case and lawyers familiar with other Labor Department probes said that investigators could refer the probe to the Justice Department and share their findings with such agencies as the Internal Revenue Service and the Securities and Exchange Commission.

Mr. Geller’s memo encouraged employees to share its content with “any client or other person” who asks about the article. It also said that executives at Focus Financial Partners, Geller’s parent company, believe that the source of the story was a “former disgruntled employee,” and it was based on “half facts, unwarranted assertions and is blown out of proportion.”

Loretta Mock, a spokeswoman for Focus, said that the company “cannot make any comment on this right now.”

E-mail Jed Horowitz at jhorowitz@investmentnews.com.

Fearing a backlash from investors who are still piling into bond funds, mutual fund companies are rolling out sales and marketing campaigns to encourage investors to shift assets into other products.

Rising interest rates are likely to cause a decline in bond fund values. But fund companies are afraid that investors will blame them for their losses.

Whatever their future problems, bond funds currently dominate all other asset classes; they attracted $28 billion in net inflows last month, according to Morningstar Inc. Fixed-income funds now represent about 30% of the mutual fund market, up from 19% at the end of 2007.

What to do is a thorny issue for fund companies, many of which are still working to regain investors’ confidence in the wake of the recession and equity market decline, said Jim Jessee, president of MFS Fund Distributors Inc.

“People have unrealistic expectations of what a portfolio manager can do in a rising-rate environment,” he said at an InvestmentNews mutual fund round table in New York on Feb. 9.

As a result, MFS is educating its sales force about what to expect, anticipating that the message will flow from wholesalers to financial advisers to investors, Mr. Jessee said.

Franklin Templeton Investments is taking a different tack. As part of its new 2020 Vision marketing campaign, the firm is distributing a brochure to advisers encouraging them to discuss the importance of equities with clients.

“Clients have been so roiled by the market that they have been shifting completely out of equities and were not interested in having a conversation about it,” said David McSpadden, senior vice president of global client marketing for Franklin Templeton.

The response from The Dreyfus Corp., a unit of The Bank of New York Mellon Corp., has been to focus on the importance of global investing. The firm is running print ads featuring global and international funds subadvised by Walter Scott & Partners Ltd.

“The next ad we’re doing is a broader, global investing theme, which will feature both global equity and international fixed-income solutions,” Patrice Kozlowski, a spokeswoman for the firm, wrote in an e-mail. “Further, we are developing a new client brochure that will be available next month on the importance of global investing.”

Whether the fund companies’ efforts will work is an open question.

“The fact is, investors are always looking for someone to blame for their mistake,” said Scott Kays, president of Kays Financial Advisory Corp., which manages $120 million in assets. “I’m not sure there’s anything the fund companies can do to avoid that.”

Nor should fund companies try to “hype” alternatives to fixed income, said Stephen Gorman, president of Gorman Financial Management, which manages $100 million in assets.

“Even as rates rise, bonds are not necessarily a bad investment,” he said.

Mutual fund companies, however, have little choice but to try to get investors to diversify, said Don Phillips, a managing director with Morningstar.

“There’s a very legitimate risk that based on the amount of money going into bond funds today, investors don’t fully appreciate the risks they are taking,” Mr. Phillips said.

It would be very easy for the industry to continue to push popular fixed-income products, he said, but suggested that the industry learned its lesson about stoking a hot market from the fallout of the tech bubble. According to Mr. Phillips, Janus Capital Inc. is still trying to recover from pushing tech funds long after it became evident that doing so was dangerous.

“That experience taught the industry to be a little more paternalistic,” he said.

There are other, less altruistic reasons for fund companies to encourage investors to allocate cash away from bond funds, said Benjamin Poor, a director at Cerulli Associates Inc.

One reason is that bond funds are a relatively low-margin business compared with equity funds, he said.

Another is that the bond fund arena is dominated by one player, Pacific Investment Management Co. LLC.

Mr. Poor questioned the assumption that investors don’t understand the inverse relationship between interest rates and bond prices.

“Investors are not just chasing the hot money and getting conservative at the wrong time. I believe some of the preference for bond funds is due to a long-term shift in mindset — a realization that they can handle only so much risk,” Mr. Poor said.

But even if many investors are surprised by the bond fund losses they may incur as rates rise, mutual fund companies won’t have too much to worry about, said Burton Greenwald, a mutual fund consultant.

“Realistically, there aren’t many alternatives to mutual funds,” he said. “The real challenge for the fund companies is to have a broad selection of funds that gives the investor a wider choice.”

E-mail David Hoffman at dhoffman@investmentnews.com.

Two broker-dealers are coming out swinging against investors and securities regulators who are looking for redress over the sale of private placements that went belly up last year.

Capital Financial Services Inc. and Securities America Inc. have been named in mass investor arbitration complaints over the sale of private placements, including Medical Capital Holdings Inc., a series of deals totaling $2.2 billion and sold to 20,000 clients from 2003 to 2009. The Securities and Exchange Commission charged Medical Capital with fraud last summer.

Both broker-dealers want to break up those group claims and conduct a series of individual arbitration hearings — a move, plaintiff’s attorneys argue, that would slow down the arbitration process and potentially harm investors.

Meanwhile, Securities America responded to a lawsuit filed last month by the Massachusetts Securities Division for allegedly misleading investors over the sale of Medical Capital’s private offering. Last Tuesday, the firm sent a stinging reply, telling Massachusetts regulators that the state’s lawsuit “misstates facts and miscomprehends the regulatory structure” of such deals, known as Regulation D offerings.

Aggressive responses from brokerage firms in lawsuits, including some involving auction-rate securities, have recently proved successful, said attorney Dennis Concilla, a partner in Carlile Patchen & Murphy LLP.

“Sometimes the best defense is a strong offense,” he said.

In general, there are two ways for broker-dealers to handle such “mass litigation,” Mr. Concilla said. “They can try to get it resolved or they can take the scorched-earth policy.”

He added that neither way is clearly superior and that tactics depend on the facts of the case, and the temperament of the attorneys and their clients.

Securities America’s response to Massachusetts, obtained by InvestmentNews, claims that the lawsuit against the company is full of holes — and that the state’s regulators don’t understand the workings of private placements and Reg D deals.

The lawsuit “mischaracterizes or simply ignores the role of selling securities [by] broker-dealers who are not underwriters [such as Securities America], outside analysts’ reports, private-placement memoranda, subscription agreements and selling agreements,” Securities America said in its formal reply to the complaint, which was filed in January.

Brian McNiff, a spokesman for the Massachusetts Securities Division, did not return a phone call requesting a comment.

Both Securities America and Capital Financial are taking clear legal action to push back against arbitration claims brought by investors.

This month, the two firms filed motions with the Financial Industry Regulatory Authority Inc. to “sever,” or separate, the investors’ claims. Plaintiffs’ attorneys grouped together clients into large lawsuits against the broker-dealers. If approved by Finra, each investor would go before a separate Finra arbitration panel.

That would slow down the arbitration process and extend hearings in the matter for as long as five years, said Jeffrey B. Kaplan, a partner in Dimond Kaplan & Rothstein PA. He and his firm are representing 15 investors in a mass-arbitration case against Capital Financial and 17 investors in a group filing against Securities America.

“We believe that the brokerage firms are seeking to sever merely as a delay tactic,” Mr. Kaplan said. “Finra would be overwhelmed with the number of individual cases if grouping … of various, very similar claims were not permitted.”

COUNTER TO FINRA GOALS

Finra likely could not handle the flood of thousands of individual cases that would be filed, he said. “What’s more, Finra arbitration … [is] supposed to foster efficiency and avoid contradictory results. The brokerage firms’ motions to sever would run counter to those goals.”

The investors’ complaint against Capital Financial was filed in November and alleges that they were sold unsuitable investments. It seeks damages of $5.2 million. The complaint against Securities America, which charges that the investments the plaintiffs were sold were “unsuitably risky and illiquid,” seeks $3.7 million in damages.

The brokerage firms certainly don’t see their strategy that way.

“Because of the myriad factual situations giving rise to [investors'] claims, and the fact that there may be different counterclaims and defenses to each of those claims, [Capital Financial is] making this motion to sever those claims,” the firm said in its Finra filing. The 15 investors “have improperly attempted to join together their unique and separate individual arbitration claims.”

The Securities America motion echoes Capital Financial’s. Investors in the claim share little, if anything, other than the fact they bought private placements that went bad, including, for some, Medical Capital notes, the motion states.

“They made these investments in different states, through different registered representatives, at different times and under different circumstances,” it states. “The claimants have no more connection among them than any other investors who purchased the private-placement products,” the motion states.

Janine Wertheim, senior vice president and chief marketing officer for Securities America, declined to comment on the firm’s legal strategy.

Brian Boppre, president of Capital Financial, was unavailable to comment last week.

E-mail Bruce Kelly at bkelly@investmentnews.com.

Two life insurers are suing a trio of broker-dealers, accusing them of fraudulently selling to third parties variable annuities with lucrative death benefits on terminally ill individuals.

The broker-dealers, LifeMark Securities Corp., Fortune Financial Services Inc. and The Leaders Group Inc., are accused of fraud, unjust enrichment and negligence for processing variable annuities that investors purchased on behalf of the ailing individuals, according to suits filed by Transamerica Life Insurance Co. and Western Reserve Life Assurance Company of Ohio.

In their suits, the insurers claim that they were misled by the broker-dealers and their registered reps about the relationship between investors and annuitants, that the brokerage firms and reps failed to disclose the annuitants’ terminal illnesses and that the firms violated contractual obligations to train and supervise their reps.

The broker-dealers dispute the insurance companies’ charges and have filed a motion to dismiss the lawsuits, asserting that they had no duty to tell the insurers that the annuitants were terminally ill. A hearing is scheduled for March 15 in U.S. District Court in Providence, R.I., regarding the broker-dealers’ motion to dismiss the case.

The insurers’ suits also allege that Joseph A. Caramadre, an attorney in Cranston, R.I., masterminded the scheme, in which he allegedly solicited terminally ill people through ads, offering them $2,000 so that investors, whom the attorney also allegedly solicited, could purchase a variable annuity with a death benefit rider on the annuitant. News about him was first reported in The Wall Street Journal.

According to the claim, investors were told that they would at the very least have their premiums returned but could also receive substantial returns from enhanced death benefits.

“The basic problem with the claims is that they’re based on the false premise that there’s some insurable-interest requirement that applies to variable annuities and some requirement to disclose the health of the person chosen to be an annuitant,” said Robert G. Flanders Jr., a partner at Hinckley Allen & Snyder LLP, who represents Mr. Caramadre and his firm, Estate Planning Resources Inc.

“This is a conscious decision that the insurers made to distinguish this product from life insurance by opting not to vet the health of the annuitant, or require that there be some relationship between the annuitant and the owner, investor or beneficiary,” he said.

Jane Riley, compliance officer for The Leaders Group, declined to comment on the case, as did Peter Blume, a partner at Thorp Reed & Armstrong LLP, who represents Fortune Financial.

Joseph Cavanagh of Blish & Cavanagh LLP, attorney for LifeMark, did not return calls.

Despite the broker-dealers’ claims that they have no contractual obligation to verify the health of the annuitant or the relationship between the annuitant and the owner or beneficiary, the transactions probably should have raised a few red flags, compliance attorneys said.

“If you’re not meeting with the insured, but rather with a designated beneficiary, then that should raise questions,” said Clifford E. Kirsch, a partner at Sutherland Asbill & Brennan LLP, who added that broker-dealers ought to make their reps question how the variable annuities being sold are used.

Even if the annuitant isn’t the party funding the annuity, suitability standards apply, and reps must know why the infirm person is buying the annuity, and how the death benefit and other product features relate, he said.

Further, a suitability check should get to the heart of where the premium dollars are coming from.

“Premium financing through another party raises issues on the source of funds and the question of why the person is buying the annuity in the first place,” Mr. Kirsch said.

A lack of an immediately discernible relationship between the annuitant and the owner should set off suspicions at the broker-dealer, said Amy Lynch, founder and president of FrontLine Compliance LLC.

“You think firms would catch a suspicious relationship,” she said. “If you have a rep who’s suddenly selling annuities, go back and look at the contracts and applications to see if the relationships make sense.”

Mr. Flanders noted that while the insurers’ complaints indicate that the annuitants are the ones who signed the annuity applications, the investors are the ones who supplied the checks and applied for the annuities.

“The annuitant has no other rights than agreeing to serve as a measuring life,” Mr. Flanders said. “The duty of the broker or the rep runs only to the investor or owner of the annuity; there is no obligation to meet the annuitant, much less vet them for anything at all.”

Other broker-dealers said they have processes in place to catch questionable variable annuity activity.

“We do not approve such transactions, and our advisers do not participate in such transactions,” said Paul Tolley, chief compliance officer at Commonwealth Financial Network.

But others said they aren’t completely sure of the soundness of their safeguards.

One executive at a major broker-dealer said that while his firm probably is not involved in selling VAs to third-party investors, the firm isn’t currently screening for it.

“If we get a new set of rules and procedures, you could just stick a stake into the heart of the product,” said the executive, who asked not to be identified.

E-mail Darla Mercado at dmercado@investmentnews.com.

As the Senate convenes this week to debate its version of a financial services reform bill, financial advisers and service providers working with retirement plans are trying to avert the possibility of coming under greater regulation by an existing or new government agency.

In the reform bill passed by the House in December, a last-minute language change added unregulated retirement plan providers to those who would fall under the jurisdiction of a new consumer financial protection agency.

Capitol Hill pundits think that the CFPA probably won’t be created, but they think that the Senate bill could give a new or existing government agency increased authority over an array of financial services entities, including retirement plan providers that may or may not be regulated currently by the Labor Department or the Treasury Department.

“My concern is that my clients are already subject to significant regulatory overlap where agents from different regulatory bodies are coming into their offices, asking for different things,” said Jason C. Roberts, a partner at Reish & Reicher, which represents securities firms and investment advisers. “There is a potential for huge confusion.”

As a result of this concern, the American Society of Pension Professionals and Actuaries, the Investment Company Institute and the National Association of Insurance and Financial Advisors are lobbying senators to exclude service providers and advisers serving the retirement plan market.

“Our concern is that having a third regulator thrown into the mix would be unnecessary and would add to the confusion and the expenses,” said Judy Miller, head of actuarial services at the ASPPA. “Just because it’s not called the CFPA, if [this legislation] creates a new department in an existing agency other than Treasury or DOL, then we would have the same concerns.”

The last-minute change to the House bill came at the request of Rep. George Miller, D-Calif., chairman of the House Committee on Education and Labor, as well as Labor and Treasury officials, according to people familiar with the situation, who asked not to be identified. Its goal is to address situations where plan service providers elude regulation by either the Labor Department or the Treasury Department, said a government official who asked not be identified.

For example, retirement plan providers may market an affiliated institution’s individual retirement account as a rollover opportunity for plan participants, the official said. Similarly, a service provider may market another financial institution’s consumer loan services.

The House bill also covers regulatory gaps related to information sharing among service providers about plan participants’ assets and income, the official said.

RECORD KEEPERS

“I want to be sure that there is more clarity around what makes an adviser or service provider a “non-regulated’ entity,” Mr. Roberts said.

One area of contention that the ASPPA is lobbying against is any new regulation of 401(k) plan record keepers.

The group, which represents 7,200 administrators and attorneys who work with 401(k) plans, has drawn up talking points and is meeting with members of the Senate, urging them to remove the House language from their bill.

Specifically, the ASPPA argues that the upcoming Labor Department guidance on 401(k) plan fee disclosure directly affects record keepers, Ms. Miller said. Also, when the Labor Department audits 401(k) plans, it goes into the record keepers’ offices, she said.

“If someone thinks there is a hole in regulation, we think they should fill it by providing whatever authority they think is missing to Labor and the Treasury,” Ms. Miller said.

But Labor Department officials argue that they don’t cover record keepers. “We don’t have jurisdiction over record keepers; we have jurisdiction over plans,” said Gloria Della, a spokeswoman for the department.

Officials at the ICI and NAIFA also said they are busy working with members of Congress to exclude retirement service providers from regulation under a Senate bill.

“If Congress believes there are lapses in federal government oversight of qualified retirement plans, it can plug any gaps by expanding the authority of the Labor and Treasury departments,” said Tom Currey, president of NAIFA.

So far, lobbyists against increased oversight of retirement service providers and advisers are optimistic.

“The people that we have talked to in the Senate seem to be sympathetic, so we are hopeful,” Ms. Miller said.

E-mail Jessica Toonkel Marquez at jmarquez@investmentnews.com.

Now that the days of generous variable annuities are behind them, some advisers are finding ways to fit the revamped, slimmed-down versions into clients’ portfolios.

The latest incarnations of variable annuities are attempting to balance advisers’ desires with insurers’ imperative to reduce risk and tamp down hedging costs. After designing living-benefit sweeteners in the early 2000s, the carriers were stretched to meet their obligations after the 2008 market crash.

“Equilibrium with the new variable annuities is something between what advisers want and what manufacturers want: the flexibility to do what you want within a rigid structure,” said Moshe Milevsky, an associate professor of finance at York University in Toronto. “Eventually, that will happen.”

Limited investment choices are based mostly on index funds or asset allocation models and dual-account structures, which divide the income and investment portions of the annuity. The changes are receiving a chilly reception from some advisers, and a curious glance from others, who have found a new way to use them.

“We’re almost using them as a special asset class,” said Moss J. Kaufman, president of Network Capital Services Inc., which manages $150 million in assets. “You’re managing risk and supporting future income goals, so we’re using these new variable annuities and applying the tools to different situations, but it allows us to be a little more opportunistic.”

Clients who don’t already own a variable annuity could still benefit from an income guarantee even if it’s not as rich as its predecessors’, but for advisers such as Mr. Kaufman who aren’t very excited about the new investment limitations, it helps to split up variable annuity dollars among several providers and products. Some might offer an attractive death benefit, while another might allow more leeway with investment choices.

“We might use three or four companies if a client has $300,000 that should be in a variable annuity,” he said. “We’re not entirely rejecting the packaged-investment choices, and we’re not demanding entirely that we make a selection from the various managers and funds they have in this.”

In the new-product arena, there’s simplicity through a baked-in withdrawal benefit and a low-cost variable annuity product, such as MetLife Inc.’s Growth and Guaranteed Income variable annuity or John Hancock Financial Services Inc.’s AnnuityNote. The drawbacks are the investment choices: The former uses a fund-of-funds portfolio to target a mix of 60% equities, 35% fixed income and 5% money market; the latter offers a balanced fund based on five indexes, plus a bond fund.

Others go for a dual-account structure, giving more freedom on the investment side of the annuity, while cordoning off the income component.

Axa Equitable Life Insurance Co.’s Retirement Cornerstone provides more than 90 investment portfolio choices, but it also provides a guaranteed-income-benefit option that invests in asset allocation and index portfolios.

Meanwhile, The Hartford Financial Services Group Inc.’s Personal Retirement Manager gives clients more than 50 investment options, while the income component — the Personal Pension Account — remains separate from the growth component and can be funded independently.

TRANSFERRING GAINS

William C. Schumann, an adviser with Schumann Financial, which has $200 million under assets, has been using the Hartford product to allow clients to invest a portion of assets while shuffling off some gains into the income side. “We’ll accumulate in the investment account and move gains or the dollar amounts as the client gets closer to taking her distribution,” Mr. Schumann said.

But clients wouldn’t necessarily go all-in. “If you have $1.4 million in assets, we might put $390,000 into the investment side of this product, $10,000 into the income side,” Mr. Schumann added.

Companies’ success in the new variable annuity arena will depend on their ability to provide advisers with multiple investment choices or significant equity exposure — as well as the ability to package the annuity with other investment and insurance offerings.

“A rich living benefit can sell itself, but for something slimmed down, you need to tell advisers how it fits together,” Mr. Milevsky said. “Make sure you have a mutual fund, an attractive single-premium immediate annuity and other products so that it’s constructed in a way that makes sense to the client.”

Failing that, advisers will likely compile a suite of products on their own to help play a supporting role to the variable annuity, Mr. Milevsky noted.

Product allocation and guidance on existing variable annuities will be the way of the future when it comes to carriers’ approaching advisers.

“One thing that won’t work is to just come out with a slim version of a variable annuity that’s more costly and that doesn’t have the benefits,” Mr. Milevsky said. “Advisers need good recommendations on how to proceed with variable annuities: Stop building new weapons and tell us what to do with the ones we have.”

E-mail Darla Mercado at dmercado@investmentnews.com.

For most investors, not having access to their money is a drawback. But to Nancy Tipton, that’s precisely what made a variable annuity so attractive.

In 2003, when she invested $94,000 in an annuity with a living benefit, she was guaranteed a 7% annual rate as long as no withdrawals were made over a 10-year period. When she reaches that point — she has three years to go — her account will have doubled to $188,000, and she can start taking a 5% payout, based on either the protected value or the account value, whichever is higher.

“For me, it was a very good savings program,” said Ms. Tipton, a retiree in her 60s. “I couldn’t spend it, and I had to ignore that it existed.”

Critics have long considered variable annuities pricey investments with expensive riders and high commissions. Low-cost mutual funds have been touted as a better alternative.

But after the stock market damage of the last decade — the average U.S. equity mutual fund rose 1.7% in the last 10 years — those who bought variable annuities several years ago are looking like investment pros, especially if they bought their annuities at a time when the insurance industry was offering sweeter deals than it is now.

At the beginning of the last decade, variable annuity sales took a plunge along with the stock market, falling from $137 billion in 2000 to $111 billion in 2001, according to data from industry group LIMRA. Being equity-based products, variable annuities often mirror the stock market, and jittery investors usually shy away from risk during rocky markets.

To protect investors from market downturns — and to spur sales — insurance companies introduced the first variable annuities with living benefits, including the 2002 release of the first annuity with a guaranteed return of principal, said Joseph Montminy, assistant vice president and annuity research director at LIMRA. The improved product had its intended effect, as sales rebounded modestly to $117 billion that year.

Further enhancements followed, including the introduction of guaranteed lifetime withdrawals, which drove sales to record heights. Sales peaked in 2007 at $179 billion.

The good news later turned bad for carriers when the market crash and recession in 2008 made it more costly for insurers to hedge the risk of their variable annuities. This led to increased product fees and a scaling-back of benefits through 2009, as well as the release of revamped and de-risked variable annuities last year and this year.

The latest crop of variable annuities reduce risk for insurance companies by offering clients a more limited universe of investment choices, muzzling equity exposure and making less generous promises in living benefits. Whether they’ll gain traction with advisers and clients is still up in the air.

As a result, clients such as Ms. Tipton are among a lucky group of clients who purchased the once-reviled variable annuity in the market slump of the early 2000s and are now enjoying rich benefits that many new customers may not ever see.

“The clients who bought back then have in-the-money benefits, so they’re valuable,” said Bruce Ferris, head of sales and distribution for Prudential Financial Inc.’s annuities business. “If they bought a lifetime income stream and they’re looking to draw down on it, that’s a valuable source of income where other assets may have been depleted.”

Ms. Tipton and her adviser, Jim Saulnier, who manages $17 million, initially saw the annuity as a savings vehicle. She jokes about having a “small spending problem.”

“In my mind, the annuity isn’t there,” Ms. Tipton said. “I’ve learned a lot by having it there but being unable to touch it, so I’ve curtailed my spending and budgeted better.” Her deposit into the annuity made up about 25% of her assets. In addition, she owns a variety of bond mutual funds and a small pension from her late husband’s employer.

Because of Ms. Tipton’s hesitation about putting all her funds in equities, Mr. Saulnier has kept the variable annuity allocated equally between stocks and bonds. Ms. Tipton was more concerned about having a way to take income later, rather than finding a way to ramp up equity exposure. The account value now stands at about $128,000.

Though Ms. Tipton said the most important feature of the annuity is the guaranteed income stream, Mr. Saulnier said it is the insurance portion of the product, which protects the account and future income from the risk of an investment loss early in the withdrawal phase.

With the guaranteed payout, the income will always keep coming — even if the account value falls to zero, he explained.

That attribute is really a safeguard against market crashes and longevity, the two threats plaguing clients in their 50s and 60s.

“You benefit from the deferral and building up the income base in the event of a market crash,” said Michael Black, an adviser at Michael Phillips Black Wealth Management, which oversees $100 million in assets. A number of his clients have benefited from locking in a high value when the markets were better, thus having access to a bigger income base.

“A big market drop or a long lifetime will dictate whether the insurance company pays; the company only pays when you run out of money,” he added. “This gives peace of mind to the investor and allows them to invest more aggressively.”

The chance to jump into equities while fencing in risk got James Huber, an 80-year-old investor, interested in a variable annuity. In 2005, Christopher J. Olsen, a financial adviser with Ameriprise Financial Inc. who manages $40 million in assets, exchanged Mr. Huber’s old variable annuity for a RiverSource product with a death benefit. The $300,000 variable annuity was just one of several investments Mr. Huber owned; his other assets included mutual funds and a pension.

“I don’t really need the annuity, so I set it up for my kids so that it can build up and I can leave them something,” Mr. Huber said. In this case, the client’s children would receive the account’s high water mark as a death benefit, Mr. Olsen said.

The exchange made sense because surrendering the variable annuity would trigger taxes, he said. Further, while the death benefit was not a primary driver of the exchange, it became more important as Mr. Huber aged and became harder to insure, the adviser said.

During the fall of 2008, Mr. Olsen ramped up the equities exposure in the variable annuity, placing the assets into a combination of emerging markets, mid-cap and small-cap funds. As of last October, the account has grown from $280,000 to $450,000.

Mr. Olsen and Mr. Huber have since pulled back slightly on their exposure to emerging markets, placing some of the gains into bond funds for added security. The variable annuity allowed Mr. Huber to get a little adventurous with his investments without having to worry about market declines’ eating away what’s being left to his heirs.

“For some older people, it’s more of an estate-planning strategy as opposed to an investment. It’s not about them, but rather a legacy for the kids,” Mr. Olsen said.

E-mail Darla Mercado at dmercado@investmentnews.com.

As 2009 wound to a close, it was hard not to look back at the global financial markets just 12 months ago and realize how far and how quickly the recovery had come. To quote our Outlook from one year ago in this same Market Review:

However, just as a strong April and May disguised the very weak returns of June, the stomach churning drop in October masks a broader rally in December that continues through the first week of the New Year. We will only be able to look back several years from now to see if the fourth quarter of 2008 represented the bottom of this bear market, or simply a pause in the decline. But for those investors with suitable long-term horizons, the current market uncertainty also presents many opportunities.

As it turned out we were off by just a few weeks and another stomach churning drop. The fourth quarter 2008 rally did fizzle out, and in fact nearly turned into a rout until the first week of March of 2009. Before the market rally was ignited in March, the Russell 1000 Index was down more than 23% and the Russell 2000 was down more than 34%for the year.

But slowly global governments came together to begin providing massive amounts of liquidity to the worldwide financial system and began providing backing to the banking system to restore trust, though too late to save many institutions. Accommodative monetary and fiscal policies thawed the frozen financial markets and allowed many market participants to liquidate positions to meet margin calls and investor redemption demands.

Through the remainder of the year, the global equity and fixed income markets rallied providing handsome returns in nearly every asset class. But the “bill” for all of this relief has yet to come due, and 2010 may see some of those costs come home. Certainly as the curtain rises on 2010, the money market fund industry is struggling to provide positive yields of any sort to their clients as 90-Day T-Bills are currently yielding just 6 basis points.

And while forecasts for the first signs of inflation, and thus the need for the Fed to hike interest rates, range from the second half of 2010 to early 2011, the increasing issuance of Treasuries to fund many of these support programs will eventually force rates higher, with or without the Fed. The biggest issue will be how the various government programs are eliminated and the excess liquidity supplied to the markets over the past year is eventually withdrawn. Premature withdrawal of government support in 1937 was one of the causes of the extension of the Great Depression.

Nathan Behan is a senior investment analyst at Prima Capital Holding Inc., a provider of investment research, technology and portfolio design to the wealth management and retirement industries.