New Rule Offers Opportunities for Reverse Mortgage, Financial Planner Relationships

A monumental rule change coming to the financial services industry this week will impact the business of firms offering compensation-based advice, but it may also create opportunities for financial advisers and reverse mortgage professionals to form new relationships.

On Wednesday, the Department of Labor (DOL) is expected to release its final rule that would amend the definition of fiduciary under the Employee Retirement Income Security Act (ERISA) of 1974. Although the rule does not address reverse mortgages directly, its impact on financial services providers, namely advisers, has implications for the use of home equity in retirement income planning.

“The future is not going to look like today,” said Jamie Hopkins, associate professor of taxation at The American College in Bryn Mawr, Pa. “The fiduciary rule is happening and it’s going to require conversations across industry silos, including reverse mortgages and home equity.”

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The DOL rule is perhaps the biggest change the financial services industry has seen in 40 years, Hopkins noted on Monday during the National Reverse Mortgage Lenders Association eastern regional conference in New York City.

Under ERISA, a person can be an investment fiduciary not only by actively managing a retirement plan’s assets, but also by “rendering investment advice for a fee or other compensation, direct or indirect.” With the DOL rule, this definition of fiduciary status will be expanded to anyone dealing with Individual Retirement Accounts (IRAs), which currently aren’t covered by ERISA.

Fiduciaries have a legal obligation to act in the best interest of their clients. In doing so, they must meet a set of required duties with an emphasis on prudence. When discussing distributions and retirement income planning, it may be prudent for a financial adviser to recommend the use of a reverse mortgage.

Is it prudent, Hopkins asked, to give advice to sell stocks in a retirement portfolio when the market is down 30% when the client has a $400,000 house that is paid off? In this situation, he said, a prudent retirement income adviser should initiate a discussion of home equity.

“If the market drops again, is it prudent to advise somebody to sell stocks when they are down as opposed to using home equity?” Hopkins said.

While a discussion about home equity is needed, Hopkins cautions reverse mortgage professionals not to oversell Home Equity Conversion Mortgages when having conversations with financial advisers.

“Just hammering over and over again about reverse mortgages might not be the best way to go about it with advisers,” he said, adding that reverse pros should simply talk with advisers to learn how home equity may fit into the equation.

Retirement income planning is challenging, with a lot of moving parts and factors—both financial and emotional—coming together in efforts to construct a comprehensive strategy. New rule changes stand to complicate things even further, drawing closer the points at which fee-based asset management, financial planning and reverse mortgages connect.

“We can’t continue on this road where we’re just looking at one program—it has to be a variety of solutions. This is a great opportunity for the reverse mortgage industry and financial services industry to work together.”

Written by Jason Oliva