Financial Planners and Reverse Mortgages: Pinpointing Hurdles, Presenting Solutions

While there are some restrictions placed upon financial planners by broker dealers and investment advisor firms in terms of discussing reverse mortgage options with clients, another element that may get in the way of reverse mortgage solutions being presented is adequate education and awareness of how the product category can be leveraged as a tool for a senior client. This is according to a trio of financial experts discussing the topic in a webinar hosted last week by RMD.

Additionally, some of the perspectives by both public and private sector regulators are outdated due to the amount of changes that have been made to the reverse mortgage product category and the rules that govern planners’ activities, according to the panelists.

Compliance hurdles

The Financial Industry Regulatory Authority (FINRA) and compliance officers at some of the larger investment advisory firms do not allow their advisors to discuss reverse mortgage options with their clients. This is due to some abuses that certain advisors were involved in related to the employment of long-term care annuities having lump sums applied without leaving enough liquidity for the client, but is a policy that largely requires updating according to Don Graves, president and founder of the Housing Wealth Institute, an Author, and Instructor of Retirement Income at The American College of Financial Services.

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“I think it needs updating, because now what we’re seeing is broker dealers don’t want advisors, their producers to do four things: don’t practice law without a license, so don’t go talking about reverse mortgage rates, terms and fees,” Graves explains. “Number two, don’t use the direct proceeds of a reverse mortgage to do annuities, equities, anything. Number three, don’t receive a commission or fee for the placement of the reverse mortgage. And number four — not always — but don’t make a direct buy recommendation of the reverse mortgage.”

This raises a question on the advisor side, however, of whether or not their proverbial hands are tied based on those four restrictions, he says. It could be argued that such restrictions go too far in allowing the advisor to fulfill their duties.

“You wouldn’t want to fight Mike Tyson with one hand tied behind your back, so we need to ask what we’re doing to advisors,” Graves says. “When ask an advisor to look at their clients’ total assets, and [the home accounts for] maybe a third to half of some of them, not [being] allowed to talk about that [may not be] in the best interest of the client.”

If a scenario were presented to an advisor where a client, as an example, had a $200,000 mortgage balance two years in a row with a 15% interest rate in a world where rates are currently historically low, being disallowed to talk about remedies that a product like a reverse mortgage could represent could be construed as irresponsible, Graves says.

“It’s not a reverse mortgage question, it’s a financial planning question,” he says. “It’s a question about the success of the retirement plan. If we’re looking at something that’s draining cash flow, and we’ve got remedies, either through a traditional home equity loan refinance, it is an appropriate and suitable thing for the advisor to [point out] how the interest rate can be lowered.”

That conversation can be had responsibly without the advisor making any unethical recommendations about specific products, lenders or originators, Graves says. It comes down to presenting the best solution for the particular problem.

“I think you’re liable if you have a client that’s paying 15% interest in a 4% world, and you don’t say something,” he says.

Fiduciary duty, and the ‘right tool for the right job’

The issue is further compounded by the fact that advisors who are registered with broker dealers or even the Securities and Exchange Commission or state securities commissioners are serving as fiduciaries, and the requirements of working as a fiduciary answers some of these obligatory questions according to Evelyn Zohlen, founder of Inspired Financial and 2020 chair of the Financial Planning Association (FPA).

“Craig [Lemoine] commented on how this move to advisors working as fiduciaries for their clients answers this question, because if you are working as a fiduciary for your client, any recommendation that you make for that client puts their interests above your own,” Zohlen says. “It is in their best interest. And in that situation, I want to have the full complement of tools in my toolkit.”

A reverse mortgage could end up serving as a very important tool, she says, and the ability to use as many tools as possible to be able to assist the client is an important, key element of making sure their needs are met, she says.

“A reverse mortgage is a very important tool in the toolkit, and you bet I want to be able to hold that one out when it’s right for that particular client,” Zohlen says. “And so actually, I have never had any problems or concerns from a compliance perspective. My E&O [insurance] would certainly take care of that. To Don’s point, I think it would not be serving my clients well, if I didn’t talk about [a reverse mortgage option] if it was an appropriate solution for them.”

Lack of awareness leads to lack of recommendations

One element that can keep financial planners from mentioning reverse mortgages as a possible tool for clients can simply be a lack of sufficient understanding of the product category. This is according to Dr. Craig Lemoine, director of the financial planning program at the University of Illinois Urbana-Champaign and executive director of the Academy for Home Equity in Financial Planning.

“The Academy just finished a research study that we spent half of this year on, and to everyone’s point, there were a lot of factors that were correlated or drove an advisor or broker or registered rep making a reverse mortgage recommendation,” Lemoine explains. “The single biggest overwhelming factor was their experience and knowledge of the underlying product. The more experience and knowledge somebody had with reverse mortgage products, the more likely they were — almost 11 to 20 fold — to make that recommendation.”

The study, which Lemoine will present in fuller detail at RMD’s upcoming HEQ conference, illuminated that specific hurdle with more context. On top of that, in talking to students at U of I’s financial planning program, reverse mortgage questions and scenarios are starting to appear in more academic settings.

“My understanding is, just from talking to students from the Illinois program, that there are a couple of reverse mortgage questions that have made their way on the CFP exam in recent years,” he says. “That’s one step towards our understanding. You make that exam blueprint, and suddenly everyone has to study. But education drove recommendation, which shouldn’t shock anybody.”

It simply comes down to the ways in which human understanding works: in a professional capacity if you know enough detail about a product or service, you can then speak more authoritatively about the ways in which that product or service can be applied to a relevant situation, Lemoine explains.

“The more you know, the more likely you are to use the tool in the toolkit,” he says. “And so, I think what we have is a bit of a gap. But, it’s an opportunity to educate advisors, agents and reps in a compliance-friendly way to get the word about what this tool is, how it can be used, and when it is a good tool to use and when it is not. I think that’s the approach we need to start taking to better help people understand what this is, and how to use it.”

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