Mutual fund firms may look at variable annuities as an opportunity to sub-advise, not as competition. But variable annuity providers don't necessarily share that sentiment.

"We don't compete with annuities; we compete with mutual funds," said one attendee at the National Association for Variable Annuity annual conference in Boston last week.

While annuity manufacturers may be hungrily eyeing fund assets, they will be the first to catalog the barriers to selling VAs versus mutual funds. Complexity of the product, on many levels, stalls many reps who might otherwise deem the insurance products appropriate for their clients.

"Simplify the story," said David Byrnes, director of the annuity group at SalomonSmithBarney. "We need to expand the financial consultants that sell the product, package it the way they want to see it."

That seemingly straightforward solution will involve change on many levels before VAs can truly compete with mutual funds.

The plethora of riders, now often sold as unbundled options to a base policy, give clients more flexibility but also require more knowledge and expertise. Some firms have developed software utilities to help brokers make selections, but they are also creating more simple products that are tailored for a specific market.

Within each policy, clients have a number of investment options. According to Info-One/VARDS, the average policy today offers 33 sub-accounts while policyholders generally use an average of 3.5.

"Sixty-one percent of all VA funds that we have in our database have assets of less than $10 million," said Rick Carey, publisher of the VARDS Report. "So I think you're going to see a lot of fund consolidation."

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