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.”


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

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  • The new fiduciary requirements have a well defined limited scope. They generally do not encompass anything other than employee benefit plans covered under ERISA and their sponsors, participants, beneficiaries, and various advisors and managers. In this case there is a new application to IRA beneficiaries and their advisors.

    Let us not be naive. Our CPA audited a few dozen plans with tens of thousands of plan participants and beneficiaries, none of whom were eligible to self direct plan assets as these were defined benefit plans. Today there are still millions of Americans covered under such plans ,mainly through multiemployer, government, and some quasi government organizations.

    While some may believe that plan beneficiary advisors have a fiduciary responsibility to present HECMs as an alternative to decumulating plan assets, that is open to question since on a pragmatic basis, when collapsing the HECM transactions to carry employee benefit assets, the collapsed transactions are little more than the leveraged financing of assets not generally looked upon as a prudent course of action. This becomes even harder to justify if a significant portion of plan assets earn less than the accrual rate for HECM costs, i.e., negative arbitrage.

    Collapsing transactions is a popular means for government overseers to determine what will be accomplished by a recommended course of action. While some are calling for treating HECMs as some odd type of pension product, it is little more than a non-recourse mortgage which allows unrestricted and unlimited negative amortization and provides some unusual beneficial features for its borrowers. While this terminology may become common in South Korea, it is unlikely to take root here except at the fringe.

    Dr. Barry Sacks would be a great source of information on this topic. As a former member of the IFEBP, Dr. Sacks has always been looked to when it comes to interpreting legal aspects of ERISA. His expertise on ERISA and its application are highly regarded by many pension experts.

    While the new definition may create new interest in HECMs, it may not be the game changer that some are promoting.

    • James –

      I think but am not sure I understand your use of the term, “collapsing” in the context of “collapsing the HECM transactions to carry employee benefit assets”.

      Could you please elaborate?

      • When there is a suggested course of action, many times the financial position of the individual is compared to what that suggested course of action results in. Then that structure and result are compared to other structured transactions to see if there are existing types of transactions that would end in similar results.

        For example, a HECM (which some are now declaring to be a pension product) is used to provide cash to a senior so that they can avoid decumulating a portfolio which has recently fallen in value.

        So let us say that a senior sells portfolio assets in January that have fallen in value the prior year to have sufficient cash to live on and in February, that senior gets a HECM to buy back those same assets which have not changed much in value. Another senior in exactly the same situation gets a HECM at the beginning of the year and uses the proceeds from the HECM to live on. (The HECM in each case is the same in respect of all terms and each is an adjustable rate HECM.)

        Most would call what the senior did in the first situation, leveraged investing. Yet how does the ending financial position of the senior in the second situation differ from that of the first? Both have the same portfolio assets at the end of the year that they did at the beginning of the year and each HECM year end balance due if all facts are the same, should be about the same.

        Conclusion: Using a HECM to support a senior during a period of portfolio (or pension asset) loss is nothing more than another form of leveraged investing.

        Naming the second example anything other than leveraged investing is nothing more than a distinction without a meaningful difference.

        However, I am not taking a position whether or not either example of leveraging is useful or makes sense but rather on their face, neither would be acclaimed by the Department of Labor as prudent. And what I am also saying is that both examples are forms of leveraged investing.

      • REVGUYJIM,

        I have revised my response so that it is hopefully more understandable.

  • In reading the article, then reading what Jim Veale’s comment stated, there is a lot of what Jim has mentioned should be taken to heart.

    I agree with Jim, the promotion of the new rule may not be all what it is cracked up to be, as far as being a major game changer!

    On the other hand, there are new found opportunities for us in the reverse mortgage space in dealing with the financial advisory community because of the new rule!

    As I pointed out in another article written by Jason, If the stock market drops again or even goes way below the purchase price paid for a stock by our seniors is it wise to sell stocks, even if cash is needed for an emergency or for whatever?

    If our senior has enough equity in their home, it may be the wises decision to take out a HECM, use those funds to meet the need while the seniors stock is underwater. At least they would not lose a fortune by selling their stock!

    When the market comes back and the senior still wants to get back to the position of having lot of equity in there home, then sell the stock and pay down on the reverse mortgage.

    I would NOT pay the RM off completely, I would leave a line open for future emergencies such as the one that would have been needed in my scenario just outlined!

    This is a good way to sell a financial Planner on the use of the HECM and how it could fit in to their retirement planning process for their senior clients. Also,This would be a great way to sell an advisor, without being overbearing and a way for them to meet the new DOL rule.

    Best of all, what a great service they rendered to their senior client at the same time!

    John A. Smaldone

    • John,

      You are assuming that the portfolio is performing at its peak. What if part of the problem is that the senior has not properly evaluated the risk of his investments in comparison to their earnings and growth? What if he/she did that at first but has failed the last few years to apply that same discipline and analysis to his/her existing asset base? What if he/she has not considered potential length of retirement in his/her portfolio asset allocation? The same is true with self directed assets in employee benefit plans and IRAs.

      By the way, DOL does not allow employers to go out and buy investments on credit (except at times real estate) for their employee benefit plans hoping that the arbitrage between the earnings and growth in the investment will exceed the cost of the debt proceeds. So why would it look at such advice as prudent when it comes to a plan beneficiary? It is not clear if any advice on reverse mortgages will satisfy the prudence requirement. Remember it is the DOL that must make that determination.

      In 2000, the stock market collapsed due to the weight of dot-com stocks. With few exceptions (such as eBay and Amazon), dumping dot-com shares as early as possible was the right course of action. In fact one could see the pattern that was developing at the time that the bubble burst. Almost all of these stocks had far fewer value in their net assets when the assets were valued at market than the market value of their stocks. How would a HECM help a senior who had 20% of his/her portfolio in dot-com stock as to that 20% back in 2000? We saw a similar situation develop in terms of financial institutions in regard to the mortgage crisis of 2008 (such as Lehman Bros. and Bear Stearns).

      We have a tendency in the industry to take simplistic examples and extrapolate them out. That might hold in certain downturns but absolutely not in others. In a market collapse, sitting on the sidelines praying that using HECM proceeds will help you recover your investment portfolio alone seems futile and dangerous. Yet that is consistently the advice many of our own give as to downturns and market collapses.

      It seems in a downturn, the right course of action is to evaluate the positions held and take appropriate action. Following that, using the proceeds from a Standby HECM rather than further decumulating retirement assets just might be a very strong response to a plateau in values or buffer against additional overall but general portfolio losses.

      If we are going to reach out to the financial planning community in a meaningful way, we had better have a strong handle on how portfolios suffer losses and what can be done about them.

      To many in the industry the positions of DOL are new and will take time to evaluate and consider. But as you state that should not stop us from continuing to develop further and stronger ties with the financial community.

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