Financial Planning Talking Points Every Reverse Mortgage Lender Should Know

Just like any relationship, whether emotional or professional, communication is integral to developing a meaningful connection that allows each of the parties involved to effectively understand the needs and wants of their partners.

While the importance of meaningful communication may sound like a cover story worthy for the front pages of glam-mags like Cosmo and Vogue, this concept is critical for reverse mortgage professionals in their ongoing efforts to forge relationships with financial advisers as well as other retirement professionals.

The financial services industry is complex and within the retirement planning microcosm, it can seem as though advisers speak a different language. For reverse mortgage lenders, that can seem to only widen the divide between them and planners.

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The truth of the matter is that reverse mortgage lenders and financial planners meet with a similar clientele. Typically, these clients are older adults who, in most cases, have built a substantial amount of home equity during their lifetimes and they’re entering retirement with the same goal: not outliving their money.

U.S. seniors had about $5.76 trillion in aggregate home equity last year and that number continues to rise each quarter, according to the most recent readings from the National Reverse Mortgage Lenders Association/RiskSpan Reverse Mortgage Index for the third quarter of 2015.

However, among Americans ages 55 and older—those nearest to retirement who should already have built significant savings—29% report having no savings or pension, according to a survey conducted last year by the Government Accountability Office. GAO’s research also consistently showed that people ages 55-64 are less confident about their retirement, with many planning to work longer to afford it.

The enormous stockpile of housing wealth among this older demographic, coupled with their unpreparedness and lacking confidence, offers an opportunity for reverse mortgage professionals to engage financial planners in a meaningful dialogue about how a Home Equity Conversion Mortgage (HECM) can best serve their clients’ needs.

But reverse pros need to be able to talk-the-talk, and that requires knowing the proper financial planning lingo to show that a reverse mortgage, when used strategically, could be the solution to any number of retirement road bumps.

“Reverse mortgage loan originators need to have a fundamental understanding of what financial advisers are trying to accomplish with their clients, which is basically to have their money last as long as they will be alive—but also taking into consideration that there will be market volatility,” said reverse mortgage industry veteran Shelley Giordano, who chairs the Funding Longevity Task Force, a group of financial planners and professionals focused on the strategic use of housing wealth in retirement.

Market volatility presents a real opportunity for the use of reverse mortgages in retirement planning, especially when considering the downward pressure faced by the Dow Jones and S&P 500 indices since the beginning of this year.

For many retirees who have a sizeable portion of their savings invested in stocks and other market instruments, having a resource that isn’t directly impacted by the ups and downs of the market could provide some extra protection for their retirement. Given the recent market volatility, reverse mortgage professionals must convey this message as they approach financial advisers.

Sequence of returns risk

Depending on a retiree’s allocation of market-related investments, dips in the financial markets could have an adverse effect on a person’s ability to retire comfortably.

As financial planning research has demonstrated—and widely publicized in the mainstream media lately—the strategic use of home equity can greatly increase the spending horizon of a person’s portfolio to last them for a 30-year retirement, particularly when using the line of credit option.

In this case, the reverse mortgage is used largely as a reserve, where a borrower draws from the loan only when his portfolio experiences a lower return. As retirees make withdrawals from their investments, negative returns that stack up early on during this period when a person is accessing their funds subjects them to what is known as sequence of returns risk.

For retirees who are living on the income they earn from retirement investments, this sequence risk is a primary concern which can cause some people to begin selling off assets for much lower than their worth.

“Understanding sequence of returns risk is important because if you have to sell-off too many assets in retirement because they are undervalued, and if there’s an extended period where there is a bad sequence of returns, that can be very dangerous,” Giordano said.

It is important for originators to have at least a basic understanding of sequence of returns risk so they can mention it in their conversations with financial advisors.

“Reverse mortgage experts need to know about Sequence of Returns Risk because this is one of the best ways a reverse mortgage can be incorporated into an overall financial or retirement income plan,” said Jamie Hopkins, professor of taxation at The American College in Bryn Mawr, Pa. “It [reverse mortgage] is one of the few assets someone might have where they can really get income that’s not correlated to the market.”

Hopkins, who is a frequent commentator on reverse mortgages for Forbes, has presented at several reverse mortgage industry conferences to discuss how reverse pros and financial planners can learn to speak the same language when it comes to serving their borrowers and clientele.

According to Hopkins, sequence of returns risk is going to be an even bigger concern as less people in the future retire with traditional pensions.

“All of a sudden, you’re going to have more people worried about sequence risk,” he said. “High net worth clients are equally concerned about this risk—it’s not a risk that only applies to a small subset of retirees.”

For reverse mortgage originators, the point is to at least have a basic understanding of sequence of returns risk, even if that means just being able to mention this concept to a financial advisor.

“If an originator can mention sequence risk and say reverse mortgages can stand in for having to make withdrawals early in retirement when the portfolio is undervalued, then they have a basis to start learning what researchers like Dr. Barry Sacks, Wade Pfau, Tom Davison and John Salter are writing about,” Giordano said.

Using a reverse mortgage to buffer against market swings and sequence risk falls within the greater context of portfolio sustainability, which is another important financial planning talking point originators should bear in mind.

Portfolio survival

Many financial advisers base their plans on the idea of portfolio survival. This is the essence of retirement planning. As advisers run Monte Carlo simulations to determine the likelihood that their clients’ assets will be able to survive a certain number of years, and under what circumstances and scenarios this will be possible, two major objectives are minimizing sequence of returns risk and improving cash flow.

A reverse mortgage helps accomplish both of these goals by reducing what advisers call the “withdrawal rate” from the portfolio. For example, if a retiree finds himself subject to sequence risk and he needs to sell 7-8% of his portfolio’s assets every year, under this strategy the portfolio might not survive a lengthy retirement.

“If we get too high of a withdrawal rate, we know that can actually deplete your portfolio fairly quickly,” Hopkins said. “A lot of financial advisers are looking for ways to lower that withdrawal rate, especially early in retirement so it increases the survivability or success of the portfolio.”

Reverse mortgage professionals should familiarize themselves with this concept of sustainable withdrawal rates and how a HECM can complement this strategy, says Giordano.

“Sustainable withdrawal rates requires having some kind of understanding of how advisers plan to unwind a client’s portfolio in a way that gives the client some comfort there is going to be enough money to last them at least for a 30-year retirement, which is what most people plan for,” she said.

The idea of sustaining the longevity of a retirement portfolio and insuring against sequence risk so as to not sell valuable assets at undervalued prices are fairly easy concepts to understand. Rather, it is the vernacular of the financial planning world that can be confusing to anyone who isn’t a Certified Financial Planner.

Such confusion can be easily overcome if originators simply consult with their financial planning counterparts to learn more about what their clients are facing and how a reverse mortgage could possibly, if at all, fit into the picture.

A collaborative effort

Conversing with an expert about a topic in their respective field can seem like a humbling experience for anyone who is less versed on the particular area of discussion. It doesn’t matter if a reverse mortgage originator has a wealth of knowledge on financial planning, or even a minimal understanding of the basic concepts laid out in this article.

The education process for both reverse mortgage professionals and financial advisers is a two-way street with each side having as much to learn about the other. What matters is how reverse mortgage professionals open the lines of communication with non-industry professionals.

“Outreach to financial advisers is a lot easier for people if they don’t try to be experts, or feel like they can’t have a conversation with an adviser unless they know all of these talking points,” Giordano said. “Retirement income planning is a lifetime educational pursuit. It’s unrealistic to believe we can be experts in it, but what we can do is go to advisers with a general idea.”

Giordano cautions originators from being overzealous and approaching advisers with a “look how much I know” attitude. Don’t try to overtly impress an adviser with your knowledge of financial planning, she warns. Rather, be genuine in your efforts to learn more about what advisers can teach you.

“You’re not going to get a reverse mortgage referral on the first meeting with a financial adviser,” Giordano said. “You have to woo them. And the best way to do that is to be genuine and authentic.”

One way to do this is to talk broadly with an adviser about the reverse mortgage research that’s out there today and learn how a HECM could fit into what they are doing and experiencing with their clients.

“As you are asking questions and being curious and actually listening, advisers are going to tell you what’s important to them and what they are seeing with their clients,” Giordano said. “You’re both working collaboratively. As long as you’re not trying to shove reverse mortgages down their throats, planners will try to understand for themselves how housing wealth fits into the equation.”

Written by Jason Oliva

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  • Well said, Jason!~With a couple of (my) opinions…1. As it is important for a Mortgage Broker to understand fundamentals of estate and retirement planning, it is every bit as important that the financial professionals actually doing the planning understand the capacities of and the different ways to structure the FHA-HECM program. I know a LOT of CFP’s who are great on theory and light on experience. Remember-Fiduciary Responsibility compels Planners to look under all the (so-called) “rocks”. 2. A CFP/Planning professional should be seeking Mortgage Brokers who actually have experience in their planning fields-Life Insurance agents tend to be the most well-rounded and creative with this program, but certainly, anyone with at least 5 years background could be a tremendous asset for a Planning Firm and their Clients.

  • I agree with Dan Turner, well stated on Jason’s part. I also agree with Dan, when he says it is equally important for the financial planner and professionals to understand the fundamentals and the importance of how the FHA-HECM works and can be integrated in their tool box.

    Hear again, it comes down to, we, the professionals in our field, reverse mortgages, to educate the financial professionals and advisors.

    Companies and LO’s in the reverse mortgage space need to understand more about how the financial planner and advisor work. We need to understand how and why they guide their clients into the investments they do.

    One important selling point we now have with the financial planner/advisor is the FA ruling. We now have a product with a great deal more credibility than it had prior to April, 27th of 2015.

    With that said, if we have a better understanding of a financial planners/advisors world, we can be in a much better position to educate them about our world and how it will benefit their clients!

    To me, this is a win, win for both sides but we better know our product well and have the answers to their questions. If we do not, our win, win scenario comes out as a lose for our side, this you can count on!

    These are professionals we will be going up against, the only way to create the relationship we are all looking for, is to be a professional ourselves!

    John A. Smaldone
    http://www.hanover-financial.com

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