The importance of home equity use in retirement income planning has been a burgeoning discussion topic in the reverse mortgage industry, as well as among certain financial services professionals. But despite the various research demonstrating the effective use of reverse mortgages in financial planning today, not all advisors are entirely convinced.
Financial advisors are the likely source of retirement planning information for millions of Americans, especially those approaching or already in their retirement years.
With rare exception, most do not recommend Home Equity Conversion Mortgages, nor do they consider them, even when the circumstances might be appropriate, according to a recent article published in the Retirement Income Journal (RIJ).
There are several reasons why advisors avoid reverse mortgages,
“As a practical matter, advisors who don’t have mortgage licenses can’t make direct commissions from a HECM or earn a finder’s fee for a HECM referral,” writes Kerry Pechter for the Journal. “Second, most brokerage advisors don’t practice ‘life-cycle’ investing, which considers an investors’ entire ‘household balance sheet,’ including home equity. Third, FINRA, the self-regulator of broker-dealers, has long regarded them with suspicion.”
But while some advisors may be suspicious of reverse mortgages based on their perceptions of these loans prior to recent HECM program changes in the last three years, others cite a lack of discussion and compensation as reasons for not considering reverse mortgages.
“In my 10+ years here, I’ve never heard reverse mortgages used in any way,” Scott Stolz, vice president at Raymond James, the national broker-dealer, told RIJ. “I haven’t even heard them discussed. We don’t compensate the advisors in any way for recommending them.”
The risk of cross-selling, in using HECM proceeds to purchase investment products—such as annuities, for example—also plays a part in advisors’ reluctance to “invite scrutiny” from regulators.
This indifference toward HECMs can be frustrating for reverse mortgage professionals, especially as the industry has been tirelessly striving to create referral relationships with financial advisors.
“It can be extremely frustrating for someone to go to an advisor to whom they’re paying a 1% fee, and say they want information about a reverse mortgage, only to hear the advisor say, ‘I can’t talk to you about that,'” said Shelley Giordano, principal at Longevity View Associates and Chair of the Funding Longevity Task Force, in the RIJ article.
Much of the wariness to accept reverse mortgage, RIJ suggests, is ingrained in the Real Estate Settlement Procedures Act (RESPA), which prohibits individuals without a mortgage license from getting paid in a mortgage transaction.
But there is one way advisors can overcome this hurdle: by becoming a licensed mortgage loan officer, said Michael Banner, founder of the American CE Institute.
“If an advisor wanted to get licensed, and licensed with an FHA-approved correspondent, they can earn a fee,” Banner told RIJ. “They would have to take part in the transaction and adhere to the cross-selling law.”
But obtaining the proper licensure may be easier said than done. For, certified financial planners (CFPs) who are also securities licensed, if they wanted to get a mortgage license, they might first need to get permission from their broker-dealer.
“The majority of broker-dealers are still agains their reps being able to do reverses,” Banner said. “They’re afraid that type-A investment advisors will convince grandma to take a reverse mortgage loan and put the money into the stock market. FINRA knows that many of its 430,000 registered reps want to be the next Gordon Gekko, and it’s afraid that it can’t regulate all of them. Fear of the ‘bad eggs’ stops them from taking the risks that might help the masses.”
Written by Jason Oliva