This month Jay sits down with Jordon Katz, Principal/CEO of JR Katz. The pair discuss Jordon's start in the business, how he uses centers of influence effectively, and the importance of producer groups. Also, race cars!
JAY: This month I wanted to chat with a producer who works almost entirely with high-net-worth clients – those capable of investing at least $5 million – and I didn’t have to think too long about who that would be. Jordon, thanks for doing this and I hope you’re ready to dig into some questions about your practice; specifically, how you came to work with such affluent clients and how their planning and products needs differ.
First, tell me about JR Katz, your role with the organization and how you approach selling life insurance.
JORDON: I am very touched that you asked me to do this interview, Jay. You are becoming the Oprah of the life insurance industry!
Let me start back at the beginning. In 1973 I obtained a Bachelors of Science degree in Finance at the Champaign-Urbana campus of the University of Illinois, majoring in insurance and risk management. Interestingly, my best courses were in statistics and I’ve often wondered if maybe I should have been an actuary! I entered our family’s real estate management business and started working with my uncle handling the property and casualty insurance for the captive real estate properties and for family friends and their businesses.
In October of 1976 I left the family business and started JR Katz. When we began, there were three of us … “me, myself and I”. Seriously, it was a bit lonely in the beginning. I had to do everything. I remember how excited I was when I purchased my first IBM Selectric typewriter. I believe I paid over $500 for it … that seemed like a meaningful technology investment in 1976.
I decided early on that I wanted to work with family businesses and entrepreneurs. Having grown up in a family business, I appreciated its unique dynamics, and also understood how the business owners and their businesses are intertwined. It’s difficult to separate the two, and in fact, we really do not want to most of the time. I believed that by establishing relationships with the owners, I would be able to sustain and grow long-term economic value for our clients and for our firm.
We focused our services and capabilities in two areas, wealth transfer - business succession and employee benefits. Within a couple of years of starting the business, I was introduced to Stuart Pockross, who specialized in group insurance and and self-funded medical benefits. We started collaborating and I realized he was an extremely valuable resource. I started outsourcing all of our employee benefits to Stuart and his team. Fortunately, over time our block of business became so significant that I convinced him in 1985 to join me as a partner.
As I was rather young when I started the business, I realized I did not have a “natural” market among business owners and entrepreneurs. Recognizing that the professional advisors, CPAs and attorneys had strong relationships with my target market, I focused my marketing on building relationships with centers of influence. We did a lot of “free work”, especially for the CPAs, whose clients often needed their insurance portfolios reviewed and planning alternatives evaluated. We worked hard to become the advisors' preferred insurance resource. To this day we still focus our marketing efforts on strengthening our COI relationships.
JAY: You have been a life-long resident of the Chicago area and I know your family goes back generations in the community. If I’m not mistaken, your great-grandfather was in the produce business, and in 1958 your grandfather, father and uncles sold their interest in the produce business and transitioned into real estate development and management. Fill me in on your family, upbringing and path to the life insurance industry.
JORDON: As I mentioned, I always thought I would enter the family real estate business. Having three older brothers, I was somewhat “channeled” in that direction. At one time, three of us were in the business together. As I was going through college, I realized I wanted to have my own area of interest, so I decided to focus on insurance. When I entered the family business I quickly recognized that I enjoyed the financial and wealth transfer planning aspect of the business, so I started working toward a CLU designation.
An interesting family experience had a significant impact on my future. In October of 1976, one of my uncles, my father’s youngest brother, decided he did not want to continue growing the business and encouraged my brothers and me to go off on our own. Six days later, at the age of 24, I was in business for myself. Clueless, naïve, optimistic, and full of energy, I founded JR Katz.
JAY: Many of the top life insurance producer groups tout the importance of relationship with centers of influence in obtaining client referrals, especially when focusing on wealthy clients. You are the perfect example of this because when you were still in your 20s, an accountant brought you into a case that propelled your career to a new level. How did this come about? Are centers of influence still a key part of your business development efforts?
JORDON: I have observed that most successful business owners are able to identify a key point in their career when they seized upon an opportunity, or placed themselves in a position to capitalize on a market circumstance, to catapult their career. This happened to me in December of 1979.
I received a call from a CPA I had developed a close relationship with. He asked me to come over to discuss a relatively new 65 year old client of his. He spent about 2 hours with me reviewing the client profile, finances and unique circumstance. About a year earlier, the client had an opportunity to acquire the Stardust and Fremont hotels in Las Vegas. He did so by assuming the prior owners debt and used all of his borrowing capacity to complete the purchase. The interesting part was that, in 1979, there was only a 50% marital deduction, so upon his death there would be a significant estate tax liability. Additionally, he had four sons of which three were working for him in the business, so he was concerned that there be sufficient liquidity to avoid a forced sale of the business.
The CPA had prepared projections that the current value of about $40M would grow to about $200M over the next 20 years from just debt reduction, not even taking into account any growth factors. The CPA also informed me that the client’s attorney, who was based in Los Angeles, was having an LA based insurance advisor also work on developing a recommendation.
Well, I left the CPAs office with about ten pages of notes and materials to digest. To say the least, I was overwhelmed. I was 27 years old, had limited tax and succession planning knowledge, and realized I was definitely in over my head. Fortunately, I was friendly with a very smart insurance advisor ten years my senior. I decided 50% of something was better than 100% of nothing, so I offered to partner with him on the case.
After reviewing the file and obtaining additional information from the CPA, we decided that the real long-term problem was planning for the “future value”. My partner suggested that we could reasonably insure the current need, but that we needed to “freeze” the value in his estate so that the increasing value would belong to the sons. He thought a preferred stock recapitalization would be our recommended solution. About four weeks later the client was going to be in Chicago and we were able to schedule a meeting with the client, his CPA and tax attorney. We presented our plan. Insure the client for $20M, implement the recap and move future wealth outside of the estate for the benefit of the sons.
Fortunately, they thought it was the perfect solution. The CPA and attorney spent an hour outlining how they would structure the recap and also bring a couple of key hotel execs into the plan. We were together for almost three hours. By the time we left, we had a signed application for $20M of permanent insurance and the authority to work closely with the professional advisors over the next year to complete the program. Over the course of the next 5 years we wrote $10M of permanent insurance on each of the four sons, and $40M on various key execs of the hotel organization. No doubt about it, this was a career changing case.
JAY: Let’s stay with your practice for a second. You are one of a handful of producers in the United States who writes a volume of private placement life insurance policies. There have been recent changes to the Internal Revenue Code’s Section 7702, the definition of life insurance, which permits most policyholder to place more premium into a policy for the same level of death benefit. This, combined with the prospect of higher taxes, could mean a huge increase in the popularity of PPLI & PPVAs. How did you come to sell private placement products and what are some of the characteristics of your clients who purchase them?
JORDON: I started working with Private Placement Life Insurance over 20 years ago. I had a client who was the president of an investment firm and had established a very successful fund-of-funds. I introduced the concept of PPLI and he was intrigued with the idea of creating an insurance dedicated fund, or IDF, utilizing a portfolio of their various funds. It took two years, a lot of legal fees, and even more patience … but we established the IDF on the platform of a major insurance carrier. This experience taught me quite a lot about the motivation of clients and their advisors.
PPLI is all about the underlying investment and that the life insurance component is simply a chassis to deliver the tax benefits. For a few years, when tax rates were relatively low, we did not write much PPLI. We were frankly distracted with other areas of our business. However, in the last 5 years we have seen significant interest in PPLI and PPVA due to a few reasons. The structure has become more cost effective, the IDF creation process has become more efficient, and the ability to create bespoke investment portfolios via the use of separate account management has become very appealing to family offices and the ultra-wealthy.
JAY: I mentioned producer groups earlier and I understand you were an early adopter of joining a producer group, starting, if I’m not mistaken, with your affiliation with M Financial Group in 1987. What is the attraction of producer groups and how do you evaluate their usefulness to your firm?
JORDON: In 1986 I began collaborating with an investment firm in Philadelphia. The founder of the firm was also a founder of the M Financial Group, Mark Solomon. It was Mark who introduced me to M and sponsored JR Katz to become a member firm. At the time, there were two main attractions to joining. First, the ability to have a broader platform of carriers to represent while being somewhat agnostic as to carrier selection because the compensation was reasonably comparable among the carriers. Second, the idea sharing and competency of the member principals/producers was extremely valuable.
In 2000, we sold our firm to NFP, yet remained in M until 2006. We decided to voluntarily leave M and move to the NFP/Partners platform because it allowed us to better align our long-term interests with our NFP ownership and collaborate more effectively with the other NFP business lines.
We re-acquired our firm from NFP in 2013, and subsequently made some changes to our firm structure. Last year, we decided to transition to Lion Street as part of our evolution. The idea of being a part of a member-owned producer group again holds appeal from a long-term growth and equity position.
JAY: I know Bob Carter has said he is thrilled you joined Lion Street. Outside of work, you served as the President of the Jewish Community Centers of Chicago, which is not exactly a passive engagement. Like your career, you’ve thrown yourself into charity work as well as your leisure pursuits. How do you spend your time when you’re not working?
JORDON: When is that?! Seriously, I am passionate about my career in our industry. I enjoy serving our existing clients and bringing in new ones. I have watched our industry remain a strong and significant financial resource to our clients in spite of the many tumultuous financial periods since the beginning of my career.
While I enjoy golf and running, albeit a lot slower in recent years, I truly enjoy my time with my wife of 47 years, Barbara, and our family. I now appreciate why everyone says how great it is being a grandparent. We have three granddaughters, ages 8, 7 and 4. They are the best!
JAY: This has been fantastic, Jordon. I’m sure our readers thinking about focusing on the high-net-worth client segment have picked up some pointers. Its time for my restaurant question so, without naming a steakhouse or steak, what are a couple of your favorite restaurants and dishes you would recommend?
JORDON: All in Chicago of course …..
Joe’s Seafood, Steak and Stone Crab – for the crab legs and not the steak!
Maple & Ash – I really enjoy the bone-in rib-eye and I realize this is a violation of your restaurant requirements. It really is first rate.
Coco Pazzo – I rave about the risotto and grilled salmon.
Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.