Evidence continues to mount concerning an evolving relationship between the reverse mortgage industry and fiduciarily responsible financial advisors. While there is still a stigma surrounding reverse mortgage products for a lot of those offering financial advice to their clients, RMD has seen evidence of forward momentum on the part of some organizations becoming increasingly willing to offer closer looks at housing wealth as a way to help clients make ends meet in retirement.
“I’m aware of a few really major firms that have made a change of mind on this issue related to – with limitations – allowing advisors to educate, speak and consider housing wealth, including reverse mortgages, as part of their fiduciary advice,” said Curtis Cloke, CEO and founder of THRIVE Income Distribution System, content expert on retirement planning and adjunct with the American College of Financial Services, in an interview with RMD. “And around that, I think those that I’ve heard about want to remain anonymous to the public. It’s an internal notice to their advisors about their new rules and regulations.”
In terms of the stigma that reverse mortgages have carried in the financial planning community, Cloke believes that it arises from two primary factors: some advisors and their compliance controllers thinking that a recommendation of a reverse mortgage would be advocating a sale instead of offering a financial tactic, and personal biases of those advisors who are not educated about the specifics of reverse mortgage products.
“They have to make clear that they’re not talking about the sale, they’re talking about the knowledge of these products, and that way they can maintain their solid fiduciary duty,” Cloke said. “Advisors have to make sure that clients can take advantage of the tools available to them. For seniors, oftentimes 50 percent or more of their wealth is in their house.”
Coming around on reverse mortgages
In terms of the bias against the product, Cloke admitted that he himself looked down upon reverse mortgage offerings because of stories that he’d seen over the years in his various capacities in the financial sector. This changed when someone whom he admired at the American College of Financial Services asked Cloke to speak with someone who was an expert on the topic of reverse mortgages. Only then, he said, would he listen and learn about them.
Cloke said that it quickly became apparent to him that many of his preconceived notions about the product were wrong. “In the first ten minutes of what he had to share, I realized that I didn’t know what I didn’t know,” he said.
What he “didn’t know” was that there was a shift in the regulatory activity surrounding reverse mortgage products, which diminished a perception he carried about the offerings operating in what he called a “wild west,” lacking oversight.
“[The discussion I’d had] took it from that and into a regulatory, controlled environment of trying to make it ethical and appropriate only when it’s right, and actually streamlining these regulations and rules in a way that would be of service to a customer […] and making sure that the wild west of the past was not being inflicted unfairly against people who were being taken advantage of,” he said.
Changes are already happening, which will allow those in the financial planning community to talk more freely about reverse mortgage options with their clients while also strictly upholding their fiduciary responsibility, Cloke believes. Much of what is needed to drive that change, however – as reverse mortgage industry personnel know all too well – is education about the realities of the product and how it can fit into a larger financial strategy.
“I would love to see the associations that support broker-dealers and registered investment advisor firms start to put this as education on their association meeting platforms,” he said. “Where positive people, who are ethically-minded, can come together to talk about these matters and demonstrate real-life situations and case studies where we can talk about the application of how this works.”
Because so much of a modern senior’s wealth is tied up in his or her home, Cloke says that it could start occurring to advisors that they may not be performing their fiduciary duty to its fullest extent by failing to include tapping home equity as part of a financial plan.
“Let’s discuss the improvement, the fact-patterns that do and don’t work well, and then talk about these tough issues,” he said. “We need to have an understanding of how we can be a fiduciary while missing 50 percent of the wealth of a client, just because we’re misunderstanding [tapping home equity] either through policy or our own personal biases.”
The right tool for the right job
To drive the point home even further, Cloke pulled out a hypothetical scenario he said he enjoys using on the speaking circuit: someone buys a brand new Cadillac, but has to bring it back to the dealer after a couple of years to take care of a passenger-side wheel problem. Shortly after the owners leave the car in the capable hands of a talented mechanic, that mechanic then brings the owners back to the car to show them exactly what the problem is.
“He explains that they’ve got a bearing that’s bad on that right front wheel, and in order to take the bearing off in a way that doesn’t damage the shaft, he has to have a tool called a bearing puller. And, of the thousand tools in his box, he hates bearing pullers!”
Because this hypothetical mechanic hates using that one tool – designed to fix a very specific problem on a vehicle – that problem goes unfixed, all because the mechanic has a strange aversion to a bearing puller, and never bothered putting that very specific tool in his toolbox.
“Metaphorically, that’s what we’re doing,” Cloke said. “When we have every other tool in the toolbox, and for that client who didn’t save a lot of money but has a lot of housing wealth […] we need to recognize what the tools are, and specifically what they do ethically.”
Recognizing the tools and how to correctly and responsibly apply them, even on a limited basis, will help advisers to fix clients’ specific problems that may be able to be solved by the employment of a product like a reverse mortgage.
“We need to stop being biased to tools in our toolbox. And then, giving advice by, in a broad sense, understanding what tools do and not caring about what they are,” Cloke added.