You could say that Steve Lewit has been playing on the financial services field for quite some time. In 2003, he and former NFL quarterback Fran Tarkenton co-founded Tarkenton Financial, a financial marketing organization. Three years later, he and Tarkenton amicably dissolved their partnership and Lewit founded Wealth Financial Group, a Chicago-based marketing organization where he serves as president and CEO. In that role, he trains independent financial professionals in addition to advising clients on their financial plans in his personal practice.
Recently, LifeHelathPro.com talked to Lewit, left, about why his clients are fearful and how fixed indexed annuities can help calm those fears. But he also says that advisors must think holistically, which means that variable annuity advocates and supporters of indexed annuities must come together.
LHP: What overall trends are you seeing in retirement planning today?
Steve Lewit: I have never seen clients that have more fear about the future than today. That fear is driving people, in many cases, either to make no choices because they are frozen in their fear or make poor choices that are not well thought out. It’s also driving quite a bit of money from market-oriented products to insured products. We continue to see a growth in our assets under management, but we also continue to see a higher growth rate in fixed indexed annuities.
LHP: So how do annuities fit into that perspective?
Lewit: We have our clients understand what their core priorities are. There are four priorities: Do you want your money to grow? Do you want it liquid? Do you want to preserve it? Or do you want income? What are your number one, two, three and four priorities? Most of our clients are putting income and preservation as one and two. They understand that they have a good chance of living well into their 90s or even 100, and they haven’t planned out that far. And they understand that to have income you have to preserve your assets and that risk may not be the best thing for them.
Once we have their priorities, then we can find the balance between their safe money and their at-risk money. Each person is a little different on how much they want safe and how much they want at risk. What we try to do with their safe money, what we call green money, is to make sure their basic fixed expenses are covered out of their green money for the rest of their lives. So that creates their income foundation. That income foundation right now is coming from fixed indexed annuities. There are also variable annuities that do the same thing, but we prefer the fixed indexed side because the fees are substantially less and there is no risk to principal.
Lewit: There are pros and cons to everything. So there is no perfect product. With a variable annuity, the money is invested directly into the market so it fluctuates up or down with the market. So that has a much higher growth potential and that’s a very big benefit in the variable annuity‑that the money can grow, and there are no caps or limits to the amount of growth. Consequently, there is no limit to the amount of loss either. And variable annuities have done a very good job of adding on income benefits, death benefits and guaranteed benefits that make them for some people very good products. The negative on variable annuities are lots of fees, some ranging in excess of 3.5 percent to 4 percent and that has to be taken into consideration in the pros and cons of whether those fees are worth the price.
An indexed annuity is not invested in the market; it’s linked to the market by what is called a crediting formula, which basically says when the market goes down you don’t lose any money. When the market goes up, you earn interest. That interest, however, has a cap or a limit to it. Most have, but some don’t have limits. But they have other things called participation rates. So the trade-off is, I don’t lose any money when the market goes down but if the market is pushing ahead, like a bull market, I’m not going to make as much as I would in a variable annuity. Fees in fixed indexed annuities are much less than for variable annuities. In fact, other than surrender fees, which all annuities have, fixed indexed annuities could have no other fees. The only time you get a fee is if you elect to have an income rider or some other benefit.
LHP: Are indexed annuities attractive to clients now because of the volatility in the market?
Lewit: Absolutely. The fear that people have is of the unknown and the volatility that they are living through. Every day is a new day and the market is a roller-coaster. A lot of people are coming into my office and saying, look, Steve, we know our money has to grow, but we don’t want to lose 20 percent, 30 percent or 40 percent in one year, even though we might make it up three to four years later. So they are looking for consistency. What takes care of the fear is to give people predictability and consistency, and that can only be done through fixed indexed annuities at this point, especially when it comes to income.
LHP: What features or riders are popular today?
Lewit: The low interest rate environment has substantially changed the annuity business. I would say at this point, 95 percent of the sales we are making are linked to generating guarantees of income in the future. Years ago when the interest rates were higher someone would buy an annuity just for the growth, to have some of their money safely invested and to grow it. But right now, with low interest rates, the caps are very low, the guaranteed interest rates are very low, and most of the money coming in is dedicated to producing income.
LHP: Broker-dealers and banks getting into the indexed annuity field. Are you seeing that and why?
Lewit: A little bit. Little by little they are starting to recognize this is a real product, basically because assets are moving from what they offer to the fixed indexed annuity side of the business. A couple of the bigger names are starting to develop their own indexed products, and we are absolutely going to see more of that in the future. The variable industry right now says that indexed annuities are a product you shouldn’t buy. That’s all going to change over the next five years.
Lewit: How do I say this in a politically correct way? Look at it this way, and this is what I teach my clients: You have to decide what financial professional or advisor you want to work with. How do you make that decision? Well, I suggest you ask them how they earn their money. If someone says to you, I get paid on a fee for the amount of assets I have under management, that person is a variable person. They want to get as much assets under management as possible and if you bring a problem to that person, their solution will always be on the variable market-oriented side, because that’s how they earn their living.
Alternatively, if you go to an insurance professional, for example, someone who sells just indexed annuities, and you bring that person a problem and that person says to you, I earn my money by commissions on indexed annuities, their only solution will be to indexed annuities. They will say, you must get all of your money out of the market, you’re taking too much risk so put it all or as much as you can in fixed indexed annuities.
I believe the trend now is, and this is where my company stands, that there is a coming together of these two sides. The advisors that are the leading edge of the market are becoming holistic advisors. They are recognizing that each side has its pros and cons and depending on the person, one side may weigh more heavily than the other. The folks that earn their money by getting fees on assets under management are losing a lot of money right now because sooner or later they are going to say, we need to capture that, we need to be more holistic. That’s what our client is demanding, especially the baby boomers. They are demanding a holistic look at their assets, demanding one-stop shopping and we need to respond to that or otherwise we are going to miss the market trends. Advisors can substantially increase their practice by becoming more holistic advisors. Holistic means they are looking at solutions on both sides, the variable and the insured side, the variable and the fixed side. Those solutions are life insurance, annuities or assets under management. Those are the three areas.