Fiduciary Rule Prompts Advisers to Consider Reverse Mortgages

Last week, the Department of Labor expanded the fiduciary standards for financial services professionals who provide compensation-based advice. A game-changer for the financial services industry, the effects of this long-awaited rule could prompt more advisers to consider the use of reverse mortgages in retirement income planning, suggest one expert.

The Labor Department’s fiduciary rule, which was released last Wednesday, will force financial advisers, even more so than in the past, to provide the best retirement advice that is in the best interest of their clients.

In some situations, that could mean recommending the use of housing wealth via a reverse mortgage to support a retirement income plan, said Jamie Hopkins, associate professor of taxation at The American College in Bryn Mawr, Pa.


“Although a fiduciary standard might not explicitly touch on housing wealth, there will be added regulatory muscle to consider all of a client’s available assets in the development of their specific plan,” Hopkins wrote in a recent InvestmentNews article. “Ignoring home equity and the leverage it potentially represents could raise red flags that the retirement adviser may not be doing everything possible to provide guidance in the best interest of the client.”

The new rule arrives at a time when the Baby Boomer generation is both entering and nearing retirement. This demographic, whom Hopkins notes are “hungry for retirement advice,” typically have three major sources of wealth to utilize: Social Security, retirement plan savings and home equity.

At the same time, the average married couple entering retirement will have roughly $192,000 in home equity, but only $92,000 in non-equity assets, according to the U.S. Census Bureau.

Advisers, however, may be overlooking the value of housing wealth, instead devoting considerable time to strategies aimed at maximizing Social Security and calculated the best approaches to withdrawal of retirement plan assets. But as recent research has shown, a reverse mortgage can be a viable retirement income planning strategy for retirees.

“Perhaps the most interesting strategy is the use of a reverse mortgage lie of credit, but the reverse mortgage needs to be incorporated into a comprehensive income plan,” Hopkins writes. “For instance, it can be set up at age 62 but only used when the retiree’s investible assets have experienced a down year.”

Read the InvestmentNews article.

Written by Jason Oliva

Join the Conversation (3)

see all

This is a professional community. Please use discretion when posting a comment.

  • Good follow up article Jason,

    This does open the door to a great opportunity for all of us in the industry. One important factor we need to remember is that we MUST understand truly what a financial planner does, what their strategy is with their clients overhaul as well as understand their language!

    We can’t just barrel in to a financial planners office and start preaching to him or her about how great our product will be for them to use, this would be suicide!!

    We need to use this new ruling as a new tool to leverage on our behalf. The financial advisor is not necessarily educated on the intricacies of a reverse mortgage, we need to be their educators on the product. We can teach them while they teach us, this way we both win and you will wind up with a strong referral partner for a long time to come.

    However, it is also equally important that when we approach financial planners and advisors in our new educator missionary roles that we understand our product to the tea! These professional must have the right answers, not guesses but the facts and how the reverse mortgage will integrate properly in their overall equation that will perfectly fit their client’s retirement needs.

    Great opportunity if we all handle it properly!

    John A. Smaldone

    • John,

      Is the door open? That position is correct if the following two conditions are met.

      The position of Dr. Hopkins must be reasonably correct. Will DOL be monitoring personal financial planning as to areas other than asset management of and oversight of the assets held in qualified and non-qualified employee benefit plans (other than governmental plans and other exempts)?

      If Dr. Hopkins is substantially correct then the next question is whether DOL will find borrowing to meet daily needs or investment leveraging to be prudent alternatives to decumulating retirement assets when such are available.

      We want people to see a HECM in more pleasant terms, the tapping of home equity (of the principal residence). Yet that euphemistic picture really boils down to borrowing and using the home as the collateral for a negatively amortizing nonrecourse mortgage. The latter description creates many hurdles that must be overcome while the former has a certain dreaminess about it that seems less real and frightening for many.

  • There is nothing in the law, current regs, or proposed regs that brings advice on the financing of (or use of the equity of) the principal residences of either plan participants or plan beneficiaries within the purview of DOL. However, if that were the situation, Dr. Hopkins makes a strong case.

    DOL has no authority to oversee the use of contingent assets (cash) that can only be accessed through subjecting a principal residence to greater risk of future loss as a result of increases to the unpaid balance due on a nonrecourse mortgage where the principal residence is the sole collateral on the mortgage. Principal residences of participants or beneficaries cannot be among the assets held by qualified or non-qualified employee benefit plans or IRAs. It is the assets (or lack thereof) of such vehicles that DOL has oversight authority. Principal residences (and their derivative, home equity) are outside the purview of DOL.

    As of yet there is no indication that DOL considers investment leveraging or living on debt through home mortgages as prudent alternatives no matter what we believe. While some may purport that there is such an indication, they should provide where DOL has stated that position.

    If HECM originators choose to meet with financial advisers and claim that DOL has ruled that financial advisers should bring home equity into financial planning, then we will need to be prepared for the potential backlash and loss in their respect for our knowledge and expertise. In a little over a year there should be more than sufficient information as to what the official position of DOL is or will be on what comprises a prudent alternative.

    With no direct statements from DOL backing the position of Dr. Hopkins, it would seem that the wisest course of action should be wait and see what happens unless asked by the financial advising community to do otherwise.

string(106) ""

Share your opinion