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.
LHP: Looking at each, what benefits do variable annuities and indexed annuities offer?
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 annuitythat 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?