Richard kado casey weade Richard kado casey weade
Podcast 58

058: A Deep Dive into Annuities with Richard Kado *

Richard Kado is the president of Genesis Financial Development. As part of the team that created the first fixed index annuity, he holds 15 patents on annuity products – more than anyone else in the marketplace – and works closely with Annexus to produce new fixed income products. At nearly 70, he’s still doing the work he loves in what he calls semi-retirement, staying very physically active, and spending lots of time with his family. Many financial advisors have complex feelings about annuities, so it was an honor to talk with one of the creators behind these products about their unique benefits and drawbacks for so many retirees. I met Richard briefly at the end of an event – right before he left to go heli skiing. Today, he joins the podcast to talk about solving problems for customers instead of businesses, the advantages of giving up the greatest growth opportunities in order to get protection and security, and the common mistakes financial planners make when talking about investment products.

In this podcast interview, you’ll learn:

  • How Richard became part of the team responsible for creating the first fixed index annuity – and how the annuity business has evolved over the last 30 years.
  • Why indexed annuities have such a bad reputation, how Richard responds to the products’ harshest critics, and why it’s so important to choose the right product to get the benefits you need.
  • Whether Richard recommends income guarantees or taking systematic withdrawals in retirement – and his recommendations for people transitioning into retirement.
  • The reasons you may want to get a new financial planner – and why 99.9% of financial planners truly have their clients’ best interest at heart.
  • The crucial questions Richard thinks you need to ask about any investment product.

Inspiring Quotes

“To me, retirement doesn’t mean stopping to work. It means I get to choose when and how I work.” – Richard Kado

Interview Resources

Stocks for the Long Run 5/E: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies

Investment Advisory Services may be offered through Howard Bailey Securities, LLC, a registered investment advisor. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. The CLU® mark is the property of The American College, which reserves sole rights to its use, and is used by permission. Howard Bailey Financial is a registered trademark of Howard Bailey Financial. All rights reserved. Howard Bailey does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Not associated with or endorsed by the Social Security Administration or any other government agency.

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Casey: Hey Richard. Welcome to the Retire with Purpose podcast.

Richard: Thank you very much. I'm glad to be here.

Casey: I'm pretty excited to have you. I get to see you every once in a while. I remember the very first time we ever met, which you probably don't remember. This was over 10 years ago. I believe it was back 2007-2008. I was down at a conference in Phoenix at which you were speaking at. I was really impressed and excited to meet you. As I went to the front counter you were checking out and I stopped you. I approached you and said, “Hey, what are you up to? It looks like you're taking off.” You said you were getting ready to go heli-skiing. I'm seeing this guy, this older gentleman. At the time you were in maybe your early 60s. You’ve got this nerdy actuary on stage and I get to meet him afterwards and he says, “I'm going heli-skiing. I'm going to go jump out of a helicopter on top of a mountain and ski all the way down.” I go, “Oh my gosh. This is the coolest guy ever.”

Richard: Thank you very much. Yeah, it is actually one of my big passions is heli-skiing, to be precise, heli-boarding or as I like to call it hell boarding. I've been doing it now for 11 years. No, you do not jump out of the helicopter. The helicopter does land and you put on your equipment. The guide that's with you says, “We're going that way,” and points in a direction and off you go. There's no track, no trail. You do have to be careful. I just literally came back yesterday from this year's heli trip. Five days up in the mountains. It was pretty fantastic. I did invade the private space of a tree a little too much. It got angry and slapped me in the head so I learned my lesson.

Casey: You’re still here.

Richard: Yeah, I'm still here. I had a lot of fun. Always try to have fun. Life is very straightforward. You've got to have fun every day. You-


Casey: You just turned 70 and you're not slowing down, huh?

Richard: No. I turned 70 and why slow down? It takes a lot of work to stay in shape, but let's do it and keep having fun because the reality is you don't know what tomorrow brings.

Casey: I would define you as a semi retiree. You should be an inspiration to most of the semi retirees that are out there or other retirees. You've stayed so engaged in the work that you love along with staying physically active. I know you spend a lot of time and family is really important for you as well.

One of the things that I know you for, and I don't know how… A lot of the peers that I spend time with they know you as the inventor of the fixed indexed annuity or the architect of the initial fixed indexed annuity design. How did you end up with that kind of fame and that title? How did you end up on that board or on that team of actuaries that created the very first FIA?

Richard: It's a long story but I'll shorten it a little bit. In 1989 I was in a situation where I was looking for something new to do. A friend of mine and a business associate of mine and I got together and we said, “Let's start something new and totally different. Let's start a company that focuses on innovation in the retirement marketplace for accumulation and for income, and create products.” Many people they might not understand products in the context of financial products, but it really is creating something. When you walk into the bank or when you sit with your financial planner they present solutions to you. Those are products. Somebody has to figure out how to manage them, create them. That's what we decided to do starting in 1989. By 1990 we'd put together a core team of individuals. To this day I still work with all of the people that joined the company back then. I've had the privilege and the agony of working with the same group of actuaries for 30 years now. We've added a lot but that core group is still there.

Now to the question. How did we come up with FIAs or why am I blamed as the architect? I'm not the inventor of the FIA concept. It was a group effort. It was all of us working together that developed the indexed annuity marketplace, but I'm the one that hangs out and talks to people more than the other guys. They don't really enjoy that very much.

Casey: You’re the social actuary. An anomaly.

Richard: Actually, technically I'm not an actuary. As my daughter once told me, “Dad, you're just a geek managing a bunch of nerds.” There's a fair bit of truth to that. I'm a mathematician but didn't go through the actual actuarial exams. I get blamed as being the actuary. It was a group effort. It came about after we'd been working a few years in Genesis that a financial planner came to us. I knew him socially. He said, “Richard, I sell a lot of interest products- CDs and fixed interest annuity products- and I sell a lot of equity products- stocks and variable annuities with a stock component, an S&P component.” He said, “Can I get something in between?” We noodled that over for a couple of years and figured out, yeah, you can. We can develop a product that has some underlying guarantees and still has a better than interest upside potential. That's how the whole thing came about. That's how I got blamed at being the architect of indexed annuities.

Casey: This introduction of indexed annuities, fixed index annuities has really changed the world of retirement planning. You've been around this annuity business for longer than I've been alive, let's be honest. That's well over 30 years that you've been in this annuity business. You've been able to not only see how it's evolved but really been integrated with that evolution. How do you think, from a high level, the annuity business has evolved over the last 30+ years?

Richard: Wow. That's a big question. It has shifted from a very simple approach of, you can have an annuity product that just gives you interest and has some retirement income guarantees associated with it. Something that focuses on just an interest rate and is broadened out. I like to use the word structured products. It's a structure that takes into account all kinds of different elements and gives you so much more flexibility. In terms of what we started in 1989 and onward has, I believe, really substantially changed the marketplace so that with annuity products today you can truly cover the full spectrum of the risk and reward comfort zone that fits with every client situation.

Casey: In other words, the annuity world has become much more flexible, much more workable or customizable for someone's given situation. Would that be a correct summation?

Richard: That'd be right on. A perfect summation. I would extend it even further. You have the basic benefits of annuity. That is an insurance company that has structured into one package very complex financial instruments into a very simple approach to the business; structured it in a way that you can have that full range, as you and I have just talked about. In addition to that, adding to it a layer of income guarantees. The income guarantees have changed dramatically since I first introduced the very first lifetime income rider that is added to indexed annuity products. Now you have a broad range of both accumulation strategies and income strategies geared to the objectives of the customer.

When we started working on these products it was very important to me to have products that really solved a problem that customers have. It's very easy when you're working in a corporate setting to solve problems that the corporation has. If you're building a car you might focus on how to solve the problem of where the knob is or something like that. As opposed to asking yourself, “What would the driver of the car want? Where would they really want the knob?” Or in our business, “What are the real objectives that the customer has, and how can we deal with those?” When you do that the reality is you have to have flexibility because your needs, my needs, and another customer’s need are all going to be very different. That's our focus.

Casey: I remember even 10 years ago, if we look down at the annuity marketplace, there were only a couple of products that we would be comfortable using or really liked to use. We thought they were good for the client. Now the choices have broadened just over the last 10 years. Over the last 30 years we've gotten a litany of new options. That has been really good for the client to have all those new options. We've seen more annuities become more and more popular and get introduced into the marketplace. Along with that you have all the annuity haters that start beating up annuities. You've got people saying, “I hate annuities and you should too.”

You said, “I get blamed as the creator of the first fixed indexed annuity.” That means that maybe there's a negative connotation of being the creator of the very first indexed annuity. Why do you think that there is that negative attitude towards annuities? What do you say to the annuity haters out there?

Richard: An annuity is a hybrid structured product. Let's step back of what annuity, what a structured product is. What we do is we take core financial instruments that are available in the marketplace and we package them together in such a way that they work and deliver the benefits and the protection that a customer wants. A lot of the critics when they look at indexed annuities they say, “You could do that on your own.” Absolutely right you could do that on your own, but there are a couple of caveats. One is you lose the guaranteed protection of the insurance company. For example, an indexed annuity has some bonds behind it and some options behind it. If you do it on your own you carry the risk of the particular bond and the particular option that you buy. Whereas with an indexed annuity, with a structured product that is a risk that the insurance company has.

Second of all, if you want to do it on your own you have to have these gigantically large purchases. Let's face it. You're not going to buy an option with a $3,000,000 price tag as your average consumer, are you? That is the minimum entry for good pricing. Like everything else in the world, if you buy a large quantity you get a better price. That is passed onto the consumer as a benefit. You have better guarantees. You have better pricing. That's what makes these structured products or indexed annuities work. A purist or a critic looks at that and says, “Wait a minute. I can do that myself and have a much more effective structure.” Yeah, but they're ignoring some of the practicalities that go into doing that. That's why you have some of the annuity haters out there. I wouldn't overplay it. The products work.

You talked about the breadth of products that are out there, the expanse of products. That's a good and bad thing. The good thing is you have choices. The bad thing is that you have choices. Meaning whenever there's a large spectrum of products available, which one fits properly? If you're doing it on your own it's very easy to come into a situation where you make the wrong selection. That's why having the right counsel, working with your financial planner, working with you is so critical that you pick out the right product and the one that delivers benefits for you. There's always a cost to benefits. If you want a guarantee, guarantees have a cost. It's a practical reality. It's not necessarily a big cost but that cost is embedded in the structure design. You have to find the product that has the right guarantee level, the right income level, the right accumulation level for a particular situation. Having all of these different products, as I've said, it's a good thing and a bad thing. I think the good outweighs the bad obviously because you can overcome the bad by simply getting good advice.

Casey: Let's take a step back. We've already mentioned variable annuities and fixed annuities and indexed annuities. I want to make it very clear that we are discussing fixed indexed annuities today and not all these other types of annuities that are out there. Some are going to be wondering, “What exactly is a fixed indexed annuity?” How would you describe a fixed indexed annuity to someone that is maybe unfamiliar with the annuity space?

Richard: Okay. Let's start with what is an annuity? At its simplest level a customer writes a check, pays a premium- a single deposit amount- and gives that to the insurance company. In return the insurance company contractually agrees to protect that money, and to provide earnings on that money, and to provide certain income options that can be triggered at the customer's desired point or not at all. In its simplest form every annuity follows that concept. You, the customer, provide money to the insurance company. In return the insurance company guarantees certain protection on your money and has a method of giving you earnings. Where the differences come in is really on the level of protection and the way that earnings are generated in the company for the product.

Let's talk about indexed annuities. What they are, they’re products that provide an absolute ironclad guarantee. 100% of your money on your account value is going to stay intact. You're not going to lose money on the market. Then the earnings are really tied to a particular stock index. Your earnings go up if the stock index go up. The good news is if the stock index goes down over the specified time period you don't lose money. You have anything that says you get to participate on the upside and you don't participate on the downside. Obviously you're not going to participate on all of the upside. There's an adjustment for that. At its simplest level an indexed annuity is a product that is a tax deferred growth opportunity, your money is protected and the growth is tied to a variety of different indices of your choice. You might get 80% of the gains, 70%, 100% percent of the gains and so forth.

Casey: You talked about gains and growth, and maybe it's not going to be as much as you could expect out of investing in the stock market. Maybe I heard that wrong, but we had a question from one of our fans, Carl Jensen, about growth. What kind of growth you're giving up when you buy a fixed indexed annuity.

Richard: Yeah. You do give up growth opportunity. The reality is if you invest directly in the stock market you will earn the best possible return. Some people might argue they can do better in real estate or in this or in that or in gold or whatever. Over the long run… There's an interesting study, a book by Jeremy Siegel, Stocks for the Long Run. He actually studied all financial instruments over a 200 year time period. Bar none the stock market beat every other financial instrument over the long run. The problem with investing directly in stocks is that they fluctuate. Average is a very difficult concept, or a dangerous concept I should say. Something that does great on average might go way up, way down and on average you're good. A really old actuarial joke is actually if you have one foot in fire and one foot in ice on average you're just perfectly okay.

The stocks or stock market itself is probably the best investment if you have a long time horizon and the stomach for it. The reality: that describes a very small group of individuals. For most of us we want to have certain protection. In my case, for example, I have a substantial amount of money in indexed annuities because I'm 70. I've earned a fair bit of money. I have a nice nest egg but I can't afford to lose all that, 50% of that and start over again. I'm not 40. I'm 70. In that case I want to have some protection, and I give up little bit on the upside to have that protection. I think back to the start of the question, yeah, you do give up a little bit on the upside to get the protection on the downside. That intuitively makes sense, doesn't it?

Casey: It does. It does at a surface level. Then the question I think comes next which is “How much upside am I giving up? How do I know what my returns are going to be over the long run?” Especially given all the different types of products that are out there, how do you give somebody an estimate of what they can expect out of these products in the way of growth over the long run?

Richard: It varies. There's been a new enhancement or an expansion of the indexed annuity product space into a great variety of indices. I want to set those aside for a minute. They're called smart beta indices.

Let's set that aside and talk about the S&P 500. The S&P 500 represents the average of the large stock market. When you tie to the S&P… Up until 10 years ago pretty well everything, every indexed annuity was always tied to… 99% of the products sold were tied to the S&P 500 and it was easier to answer that question in that context. In that context I would argue that depending on the time period that you were in, an indexed annuity gave you a little bit more earnings than straight interest that you could earn, but less than what the S&P index would earn. It would sit pretty well in the middle between the two. Some of the problems that we had in the industry is that financial planners and consumers didn't necessarily hear that. They thought they were going to get the whole S&P 500 index performance. “I'm going to participate fully in the stock market.” No, you're going to get less than the pure index but more than what you would get in interest earnings.

The rule of thumb back then was you'll get 1% or 2% higher than what you could get in a CD or in an interest-bearing instrument on average over the long run. Yes, there could be years. We see policies that have that where you would have earned 30% in one year. The stock market might have done 40% but you earned 30%. Don't expect 30% every year. Be happy. You're not going to get any of your losses and that's why you didn't get the 40%. On average you just get about a percent, maybe 2% more than what you might earn on a pure straight interest-earning instrument in the marketplace.

Casey: What I think is often overlooked is most people think that they're investing… “I aim to beat the market.” You're looking at it and benchmarking against, say, the S&P 500, which you can’t invest directly in the S&P 500. There's always going to be some cost involved. Nobody's ever going to go 100% equities unless they’re extremely aggressive. They're not going to do that in retirement for that matter. They're really probably comparing maybe a managed stock and bond portfolio, and that performance of being in the market in that fashion versus a fixed indexed annuity where they’re maybe getting 50%-70% of the gains in the market.

Richard: Yeah. That's exactly correct. That is the way to look at it is you're really not going to go purely into the S&P and 100% of the market. You're going to split stocks and bonds. Then by comparison it winds up being very similar performance that you can get.

Casey: Yeah. I think this is probably one of the key reasons that annuities, specifically I should say fixed indexed annuities have been gaining in popularity. We've seen variable annuities falling in popularity, fixed indexed annuities gaining in popularity. In your opinion, why do you think that we've seen such an increase in the popularity of these types of products?

Richard: Demographics and market forces. Let's talk about demographics. I hope it's not a surprise to anybody: there are a lot of baby boomers retiring. I'm the leading edge of the baby boomers. We’re retiring. I'm a little late at retiring because I'm just having too much fun still doing the things that I enjoy. Some people call it work. For me it’s fun. As our demographic has reached this point in time of getting closer to retirement more and more people are starting to realize, “Hey, I've got a nice nest egg. I can't afford to lose that nest egg the way some people lost it back in 2008.” Losing 50% of your money. Granted, if you left it there within a couple of years you would have made it all back. Everything would have been nice. Still, losing 50% when you then have to draw money out for retirement that has a permanent lifetime impact. The baby boomers are getting older. They're starting to realize they need that downside protection, and they want to maximize the opportunity to earn money on their money. That's why indexed annuities have become popular versus variable annuities.

Let's talk about what variable annuities are. Variable annuities are products that provide a direct investment in funds. Basically, they're not mutual funds but you get the earnings like a mutual fund within the tax wrapper. They have no downside protection. Yeah, there's some downside protection you can add to them but it's really not as clean and effective as what you have with an indexed annuity. With an indexed annuity it's very simple. You protect your money and you will earn more than you would typically with an interest-bearing instrument. That’s why it’s grown in popularity.

Casey: As it's grown in popularity it seems like it's mainly been distributed through these independent advisors that are out there today. You don't typically see them being offered by the large institutions, the largest brokerage houses, the largest advisory firms in the country. These are typically known as brokers or wirehouses. The big names that are out there, the majority that people are working with maybe they're starting to catch on to this. Why do you think that we haven't seen this fixed indexed annuity product start to get introduced or be widely used by these large brokerage houses or wirehouse firms?

Richard: Institutional rigidity is probably the simplest way to answer that question. Something that is new and different… Granted these products have been around for 20 years, but in the context of companies that have been around longer that is still a short timeframe. There is institutional rigidity as to what will be offered. “You will offer these products in this approach and don't deviate. If you want to deviate from that you don't belong in our organization.” That rigidity does not lend itself to finding unique and new solutions to client problems. As a result, it has been more of organizations that have a strong client focus and independent financial planners that have picked up indexed annuities. They recognize what these products bring to the table.

Casey: Some-

Richard: By the way, it is changing. The wirehouses you referenced they are starting to sell indexed annuities now.

Casey: Sure, yeah. I love that evolution. It's nice to see institutions finally getting to a point where they're providing options to their clients. Maybe they're not always the right fit for everyone, but for some people it is exactly what they're looking for. They're looking for upside potential, downside protection. “I'm not trying to hit any home runs. Just don't bury me the next time we have a major financial crisis. Give me 4% or 5% and don't lose my money.” That begs the question that we often get and we had from some of our fans which was, how do I know an annuity is the right fit for me? Or how do I know how much fixed indexed annuity I should use? John and Ruth Schoonover asked, “What percentage of a retirement portfolio should be invested in a fixed indexed annuity?”

Richard: That's one I can't answer because it really depends on a particular client situation. If you have a high net worth client with lots of assets but no pension, for example, you might want to consider putting enough in an indexed annuity to generate a lifetime income, using that income rider feature so that there is still a base amount of income no matter what happens. It's actually a very efficient way of generating income. If you have somebody with very limited assets looking to accumulate as much as possible, that individual can't afford to lose any of their money. They might try to swing for a home run but if you strike out you're in trouble. In that case accept that singles and doubles and triples are a lot better than a strike-out. Just go for that and have a safe approach. There again an indexed annuity makes a lot of sense. How much as a percentage of your total available assets truly depends on a particular client situation.

I firmly believe in financial planning and financial planners. I have a financial planner even though I develop structured products and I know the market and these concepts intimately. I still have a coach that helps me in my financial planning. By the way, just like I still have a coach that helps me with my snowboarding and my skiing. Even though I'm pretty good at it there's still more to learn. On your finances you’ve got to have a coach. You’ve got to have a financial planner to answer that kind of question.

Casey: In other words, someone that is looking at these products they really need to be in one of two camps. Either they’re looking for principal protection and growth potential or they're looking for a guaranteed income for the rest of their lives, or maybe a combination of those two things. Is that a good summation?

Richard: Yes. I'd like to just tweak that statement a little bit. First of all, the combination of the two is very important. In reality most people ought to look at both things. If you're taking income you still need to make sure that the rest of the money you have in the product has growth potential because you don't know what's going to happen down the road. You need to make sure that your assets grow as effectively as possible with downside protection.

In terms of income you said guaranteed lifetime income. There's one tweak. When we first introduced income riders that was our focus, is just to have a guaranteed income. I could look at that and I could say, “Yeah, this product has a guaranteed income of $1,000 period.” Or “Five years from now when you want to retire it will have a guaranteed income of $1,500.” Now what we have evolved and the designs that we've been working on is a lifetime income that has an underlying guarantee but gives you an opportunity to increase that potential income. Where I can say to you, “Hey. This income feature in five years from now will give you a guaranteed income of $1,400 a year. Over the next five years if the indices do well, the market does well your income guaranteed at that point, not guaranteed today but guaranteed five years from now, could be $2,000.”

We have income riders with underlying guarantees and growth potential. That is a good summation in terms of the way customers should look at it. They either want to accumulate some money for some future date or they want to generate some income both with guarantees and income with upside potential.

Casey: That leads me to another question. I've long had this debate with other financial planners along with clients alike and peers of mine, which is the benefits of an income rider. If we should really be utilizing an income guarantee attached to a product that's going to give us X percentage of income for the rest of our life. Or if we should just get rid of the extra cost of the income rider, go with an accumulation based product and just take systematic withdrawals. What are your thoughts? If this was you… You’re maybe going to step into retirement at some point in the future. Are you going to use an income guarantee? Or is your confidence in such a position to say, “I know I'm going to be better off by eliminating that cost, getting better growth and taking systematic withdrawals?

Richard: I think it's a mistake to develop a lifetime retirement income plan based on systematic withdrawals. Systematic withdrawals are a very good tool to use during that, shall we say, interim period. The period that I'm in where I am not working full time anymore. I'm working half time. I'm spending more time on retirement activities. I'm doing the work activities that I love-

Casey: Retirement activities like heli-skiing.

Richard: Yeah. At that point now there are occasions when I want to supplement my cash flow I might take a systematic withdrawal. I haven't yet but I know I can if I need it. At the point where I'm taking systematic withdrawals all the time I’ve got to stop and ask myself, “Wait a minute. These withdrawals, if I keep doing that am I going to run out of money? Is there a better way to do that?”

A lifetime income is typically a better way to do it because you eliminate the longevity risk. That's the bugaboo in all of this, is how long are you going to live? If you can guarantee me that you will die in such and such a year, boy, the financial planning we can do is awesome. We'll make sure in that year you have zero money left. The reality is you can't guarantee that, so you have that longevity risk. That's what insurance companies do year in, year out. They understand large groups of people and how to manage that longevity risk and pool that risk amongst everybody. That's built into a lifetime income rider. If you don't know how long you're going to live and you want to have regular income in every circumstance a lifetime income rider will beat a systematic withdrawal.

Casey: Okay. That's good enough for me. What I gathered from that is if I'm in a position where I need income I get an income rider. Then if I might have a withdrawal- I want to take a vacation every once in a while or it's buying a new car- then I can always take systematic withdrawals. That kind of sounds like maybe I'll have two different types of annuities or two different annuities.

Along with that question from John and Ruth's Schoonover, they had asked about diversification and if we should have more than one annuity. I always talk about diversification in the investment management world: stocks, bonds, mutual funds. You don't want all your eggs in one basket. Does that carry on over to the annuity world?

Richard: In a different way the answer is yes. Critical, first of all, is the insurance company that you choose. You want to make sure that the company that's providing all these promises and guarantees to you is a respected company with a good, strong track record and a good financial rating. That's a given. Beyond that should you buy more than one annuity? The question then is, what's the purpose of that money? If you have two very different purposes, you say, “I need a baseline income of this amount in five years.” You might put enough in that annuity to generate that income five years from now and do something different with the rest of the money. Something different might be a more aggressive indexed annuity or something else, depending on your comfort level. If you are really focused on just accumulating your assets and building some upside, and then you know you're going to use all of that money to generate income when you reach your point when you truly need that specific guaranteed income level maybe one product is the right way to go.

Again, it depends on circumstances. It depends on the particulars of your needs. What is your objective? It always comes down to… These products they're only here for one purpose, and that purpose is to improve your retirement lifestyle to meet your objective. Whether you have 1 product, 2 products, 3 products, 10 products it depends on what is your objective? What are your means? For that you’ve got to figure out and walk through a financial plan.

Casey: It sounds to me like you're saying if someone has this goal of, say, accumulation then they could pick the right accumulation. A fixed indexed annuity that's going to give them the best growth potential and principal protection. It could be with one single company and you wouldn't have any concerns about that. I've heard people say, “That's kind of like buying a single stock. I don't want everything with one company.” How safe are these fixed indexed annuities? How do we know that it's going to be there forever, and especially when we need it?

Richard: It is not at all like putting all your money in a single stock. You have to step back and say, what does the insurance company do when you pay the premium for an indexed annuity? Every insurance company has very strict regulatory limits on how to invest that money. Most of the money, without getting into technicality, winds up in bonds and other safe investments. They have limits as to the quality of bonds. They have to buy quality bonds. They have to buy quality investments. They have diversification requirements. The money that you pay the insurance company for your index annuity is in fact very diversified and spread across many different investments. In that sense it's not at all like buying a single stock. You're really asking an entity to diversify your money and to package it and structure it and give you a benefit.

The money is diversified. The risk that you have is the quality of the insurance company and that the company itself could go belly up. The reality is I think in the history of the United States there has been only one company, maybe two companies that have had serious financial problems. If you think about all of the insurance companies in the United States that's a very small number. This is where ratings come into place. There are the rating agencies that look at the industry and look at the financial strength of the company. You want a company that'll be around 30 years from now. My advice would be always to go with a highly rated insurance company that has at least an A rating. That's an indication that professional evaluators think this is a company that runs its affairs conservatively and properly. That has the underlying diversification of its assets, and that has enough reserves in its back pocket to pay the promises that they made to the customer no matter what actually happens to the underlying investments.

No, it's not at all like investing in the single stock. If you're going with a quality carrier you have tremendous financial strength, diversification and reserves that back up the promises that are being made to you by the insurance company.

Casey: If these insurance companies have these reserves… Let's talk about that a little bit. I had a couple that locked in an excessive, a 30% gain over two years. They're looking at it going, “Where do you guys make any money? How did the insurance company actually make any money if I made all of this in a safe instrument where I can't lose my principal and I just made 30%? My friends over here in the market made even less than I did and they're being charged an annual fee for this, and the advisor’s actually collecting a fee.” How is the insurance company making any money on this type of product?

Richard: The insurance company takes a small spread, a small skim on the underlying assets, but the insurance company really also does not want to take inappropriate risks. What they do is… Taking the example of somebody that earned 30% on an indexed annuity, that didn't come out of the pocket of the insurance company. What the insurance company does is when they get all of the premium most of it is invested in very safe bonds, quality bonds, and a little bit of money is set aside. Then the cash flow, the dividends from the bonds is also set aside. That money is used to buy something that are called options.

Options are a financial instrument. The insurance company goes to Wall Street to the big investment firms and says, “Hey, I’ve got… ” They pool it together and they say, “I've got $3,000,000 here. I want an option on the upside of this index.” The investment firm says, “Terrific. Here you go.” We come back a year later or two years later and the index has gone way up? It's the investment firm that has to deliver. The market has gone way up. The insurance company paid the cost of that option upfront. The investment firm keeps that money. Now two years later the investment firm has to cough up because the index gained 30%. They pay that money to the insurance company. The insurance company pays that money to the customer.

The investment firm in turn diversifies. They do all kinds of things in the background in terms of how they invest the money so that they're not totally at risk either. The insurance company doesn't put all of the options with one investment firm. They spread it around. Diversification, again, with different companies so that if one of the investment banks goes belly up… Did we ever see that? Yeah, we did. By the way, some of the options that insurance companies had purchased in 2008 were not delivered on, but there was enough reserves and it only was a small percentage of the total portfolio that the company had so it was not a problem. That's a long-winded answer to a very simple question.

The answer is, yeah, the customer earned 30%. The insurance company was able to pay that because they had purchased an instrument from Wall Street that delivered to the insurance company that 30% gain. It wasn’t an exposed risk. It was a managed structure.

Casey: We know how the insurance company makes money. They take those dollars, as you said, they put that into a bond portfolio or maybe some real estate investments. They've got investments that are backing up your deposit. They take the interest only off of those investments. They take a small piece of that interest and then they utilize the remaining interest to buy options, which if the index goes up you credit interest. If it goes down the options expire worthless.

However, then it gets down to the advisor or the agent that ultimately sold or positioned that solution for the client. One of the criticisms you often hear is the only reason the advisor sold that product is because they made a huge commission. What would you say to individuals that are saying, “The advisor’s only selling that because they're doing it for the commission and they're making too much money selling you a fixed indexed annuity”?

Richard: Find a new financial planner. It’s really simple. If you believe that that's the case, get a new financial planner. I've met hundreds of financial planners over the 30 years. Let's be honest, maybe I've run into one or two that I wouldn't want to do business with them. 99.9% of the financial planners out there truly have the best interest of their customer in mind. They understand that they’re in the business in the long run and they have a reputation and they have integrity and ethics. If they don't do the right thing they're going to be out of business. They want to do the best thing. The financial planners I've met all have approached me with questions and ideas centered on “How can I make sure that I put more money in my customer's pocket?” That has to be the underlying objective of every financial planner. It is in fact the objective of the financial planners I've met. If a customer thinks otherwise or has concerns about it, get a new financial planner. Yeah.

Financial planners are paid. They make money one way or the other, either a direct fee, a spread on assets or a commission. A financial planner has to live and has to be educated and has to get knowledge and has to contribute. They do that by contributing to the wellbeing of the customer, by giving them the right strong advice.

Casey: Some of the individuals that are out there might be saying to themselves, “It's time to explore these types of vehicles, these types of products. I'm looking for principal protection, upside potential. I want a guaranteed income. That sounds great to know I'm never going to run out of money.” This sometimes results in shopping around and trying to find the right solution and the right adviser. If someone's evaluating the addition of a fixed indexed annuity to their portfolio, what types of questions should they be asking the advisors that they're speaking with?

Richard: It's hard for me to answer that. I can tell you product specific questions they might want to ask the adviser, but whether that is the right advisor for them or not that's something that others can comment on probably more lucidly than I can. In terms of the product itself the questions I would ask is “What are the underlying guarantees that I'm getting? Then what is my upside potential forward looking? Don't tell me about how this did over the last 10 years. Tell me about how this is going to look into the future. What are the income guarantees?”

Another aspect we haven't talked about and something that I feel very strongly about is if I need to pull money out of this account, a withdrawal because I had an emergency or I just need access to my cash, how much do I get? What are the surrender charges? There’s something we call free partial withdrawals so you can get some of the money out without any charges at all. You need the money, it's your money so here it is.

There's an interesting feature, and it took us quite a number of years to figure out the math and the investment strategies behind it. It's one I feel very strongly about. That is that if you do get a free partial withdrawal you should always insist on a product that gives you that free partial withdrawal with all of the gains to date delivered to you. If you're in a two-year indexing time period and you draw out your money six months after the start of the indexing time period, you should get all the gains to date for that six month period. It seems logical to me. The math behind it and the investment strategies behind it are very complicated and it took us a while to figure it out. A number of products have that. I would say that that is an essential feature to have.

I do want to talk about one other thing in that arena. So much of the discussion in financial planning is centered on looking back. Looking how did that product do over the past time period? You find the same thing with mutual funds. A lot of discussion on “This is a three star product and it's got this Morningstar rating. Here's the history of the product and indexed annuities and illustration of the history of the product.” I think those are essential but it is, from my point of view, critical to also look into the future. If I can give you an example, if you're driving a car you've got a small rear view mirror and a big windshield. Why is that? You should only spend a little bit of time. Yeah, you’ve got to look in the back and see what's behind you and understand what's behind you. You have to understand the history of the product and how did it perform in the past? But you cannot drive a car only looking in the rearview mirror. You've got to look at where are you going? You have to look at the roadmap. You have to look at the windshield and see what is ahead of you. What obstacles are there? Similarly, in terms of products I think it is essential for the financial planner and for you to look and evaluate products that make sense into the future, specifically the indices. There are some indices that did really well in the past because of certain market conditions. Those market conditions might be totally opposite and the index will do really badly into the future.

“Why are we going with this product? What is the forward looking potential for me as a customer?” That's where, again, the relationship between the financial planner and the customer is essential. The customer ought to ask questions. “How is this going to work into the future?” How do you answer that question? There is no simple answer to that. We don't know what the future brings, but there should be good logical arguments as to why this makes sense given our view of where things are headed today.

Casey: One of the things that people struggle with as they're making this decision. You talk about the future and that is, what's the appropriate term? You talked about surrender charges. Some of these products have surrender charges that are 8 years, 5 years, 12 years, 15 years. What do you say to someone that says, “I can't imagine tying my money up for 12 years?”

Richard: Then don't tie it up for 12 years. The practical reality is if you're investing today and you're doing this for a long term strategy, like a lifetime income strategy or a long term accumulation strategy, the longer you tie up your money the greater the earnings potential is based on today's economics.

I bought a product for myself. I used a 12 year time horizon for that money, a 12 year surrender charge period because I knew I had a long term horizon. I knew that in terms of… Again, it's kind of common sense. If you invest for a very long time period and you're telling the insurance company you're going to stick with them for a very long time period, they in turn can invest the money in longer duration financial instruments which typically give you a bigger bang for your buck. The longer you invest, the bigger bang for your buck.

The downside is if economics change substantially you're tied up based on today's economics. That's kind of the yin yang of that. Generally I would say since I can't predict the future, I'm going to focus on today. What is my objective? Am I investing this money for retirement 20 years from now? Then a 12 year time horizon doesn't matter. Am I investing this money for lifetime income? I'm going to live longer than 12 years probably so, again, it doesn't really matter. I should go for the best bang for my money based on today's economics.

Casey: That being said, you talk about length of time period leading to better growth potential. As a CEO and founder of Genesis, you have this partnership with Annexus in developing products. Annexus’ name is on a lot of the top-selling fixed indexed annuities year after year. There are some things that make them unique.

One of those things that makes them unique is quite often you find that they have not just a one year lock-in period. Most fixed indexed annuities they lock in your gains every single year. You can't lose them the following year. A lot of the products that Genesis and Annexus have developed together have led to longer term lock-in periods. Not just one year, but two years, three years et cetera. Why make that change? Why go with a two or three year lock-in period? Is it along the same lines that the longer term, the better growth potential that we're going to have?

Richard: I have almost a blinkered long term focus in terms of product design. It's really straightforward. In designing a product we always want to figure out a way to put more money in the customer's pocket. How do you do that? You look for where are the pricing efficiencies available? When you go to Wall Street… We talked about buying options. When you want to participate in the upside, the insurance company promises you the upside potential but it turns around and goes to Wall Street and says, “I want to buy an option. I want to buy the upside potential. If it expires for nothing I didn't lose any money but I'll pay you the money upfront. If the market goes up you give me the gains.”

When we looked at the options and the pricing structure of the cost of the options it became very clear. If you buy one-year options they're expensive. If you buy two-year options it isn't one plus one is two. It's one plus one is three. You get bigger bang for your buck. You get more options. Yeah, you’re exposed to the ups and downs over that two-year time period, but not locking it in every year is not as great a benefit as the extra price advantage that you get. Bottom line is we can put more money in the customer's pocket by going to two years, three years, four years. The longer you go out in the indexing measurement’s time period the cheaper the options get. Which means we can buy more options, which means we can buy more upside participation. Just simply, more money in the customer's pocket. That's why we did it.

Casey: That's one of the things that I know you have said. Every meeting, every time I've ever heard you speak you're always talking about putting more money in the client's pocket. Going out two, three, four years it sounds like we're able to get exponentially more growth potential, and ultimately more money in the client's pocket by going out through those longer term periods, those longer lock-in periods.

Richard: Exactly.

Casey: We've covered a lot and I literally made it through almost half of my questions. I know we’re running out of time. I want to make sure we get through a couple of wrap-up questions that I have for you that are maybe a little more general in nature. One in particular, as someone that's been in this business for so long and is so passionate about it. Getting into your 70s and saying, “I'm not quitting because I want to change the industry.” That begs the question: if you could change one thing about the annuity industry, what would it be?

Richard: We touched on it already. It's really the emphasis on historical data. I think looking at history is essential in every aspect of life. We would be total fools to ignore history. We learn from history, but we cannot rely on history alone to manage the future. If there's one thing that I would strongly advocate is that financial planners sometimes spend too much focus on illustrations that show the past. I think illustrations are essential to demonstrate how the product works. To say, “Given the history and the motion of the market and the motion of the index, here is how the product would have performed.” That educates you and helps you understand where the guarantees kick in, how much of the reward, how much of the upside you get.

I'm not suggesting financial plans to actually say that, but sometimes customers hear that from a discussion of historical illustrations. To say that the product did X over this particular timeframe, therefore that's what we can expect into the future. That's folly. That's one area of where I think we can do better is by using illustrations to understand, but by then asking ourselves, “What is the future potential here? Why am I using this index? What are my expectations going to be into the future?”

Casey: I think that was addressed at one of the last times I had the opportunity to see you speak. You talked about how you really spend a lot of time taking a look at a lot of these indexes, especially the managed indexes, the beta indexes you mentioned that are now being utilized for these products. It's not just the S&P 500. There's a lot of these indexes that you can utilize now. Many of them are just back-tested so you don't actually have performance that goes back 5 years, 10 years. You want to really dig into those numbers and see if they were just fabricated and they just picked this index because it would have done well the last 10 years. You want to know more importantly, “Let's test it, given the economic conditions we know today what we can expect moving forward out of that particular index.” I think that's one of the things that makes Genesis and Annexus quite different.

Richard: Thank you very much. By the way, that's a whole other topic, these smart beta indices. I think they're fantastic but, you're right, there are a number of them out there in the marketplace that are, shall we say, inappropriately structured. They look good because they were designed by somebody who looked at the history as opposed to asking themselves, “What will the future bring? Let's structure something that has a good future-looking perspective.” I would argue that none of ours have that because, as you just said, when we look at indices between Annexus and Genesis we spend an inordinate amount of time looking at, was it structured properly? Does it have a theoretically good foundation? Is it going to hold together into the future?

Casey: Yeah, absolutely. I remember, I believe it was an actuary speaking on the topic of being introduced an indice that they had recommended you guys use in one of your products. The actuary said, “I need the data.” They had showed them the historical returns. He said, “I need the data. I want to know how you actually created the returns.” On the other side I believe it was maybe an investment bank. They said, “Why do you need that data? It's not important. You can see how well it performed.” He said, “I need the data. I want to know how you created these returns so we can see if it's actually going to do that in the future or if you just made this stuff up.” I thought that was a really neat conversation.

Richard, thank you so much for joining us. I've got one final question for you being you're just entering your 70s. As we got started here you said you were maybe slowing down, maybe having a little bit more free time on your hands these days. Let me ask, what does retirement mean to you?

Richard: It's very simple. It means control of my time. I choose what I do, when I do it. To me that's what retirement is all about. I'm continuing doing this thing that's labeled work. To me it's just a fun thing to do but I control how much time I spend on it. I control how much time I can go to the gym, how much time I can go golfing, how much I'm biking, how much time I spend with the family, traveling. I have control of my time, which means I really have truly control of my life. I've always tried to do that and manage that but now as I approach retirement I truly have 100% of control of my time. To me retirement doesn't mean stopping to work. It means I get to choose when and how I work.

Casey: Exactly. The financial freedom to choose. I like to sum it up that way. Richard, thank you so much for your time. I know you're a very busy man but I know this was a valuable conversation for many. For that I thank you and I look forward to seeing you soon.

Richard: Terrific. Take care. Bye-bye.