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The Home Equity Advisor
Featured Article - From the FA Perspective

This edition of The Home Equity Advisor features an in-depth article from industry expert Curtis Cloke, CLTC, LUTCF, RICP. Curtis is an award-winning financial professional and retirement income expert, trainer, and speaker with over 25 years of experience in income distribution planning. Curtis is the CEO and founder of Thrive University , a series of seminars for financial advisors, and a contributor in other financial industry publications.
Moving Forward On Reverse Mortgages –
It’s Time For Change
Financial advisors and reverse mortgages often don’t mix. The reason is frequently due to the roadblocks put up by Broker-Dealers. Some BDs have gone so far as sanctioning advisors who merely discuss the use of reverse mortgages with their clients. These draconian rules are the result of a knowledge gap and the need to adapt to changing circumstances. It is time to start a dialogue to hammer out a new set of guidelines that could benefit all sides.
Not Your Grandfather’s Reverse Mortgage

There has been an evolution in the reverse mortgage industry. First, the industry had to deal with the fallout from several scandals. These were legitimate problems and abuses, which today have been addressed and corrected. BDs and their compliance departments need to recognize the progress that has been made and adjust their rules accordingly.

Second, there has been a great deal of empirical research in recent years that demonstrated the efficacy of reverse mortgages as part of an overall retirement strategy. The prevailing position, as exemplified by Financial Industry Regulatory Authority (FINRA), was that home equity should be used only as a “last resort.” In 2012, the seminal work by Barry and Stephen Sacks utilized Monte Carlo simulations to analyze the probability of success using various portfolio strategies and withdrawal rates. [1] The results were eye opening.

The Sacks study found that reverse mortgages, by using previously untapped home equity in the early stages of retirement, dramatically increased portfolio balances over a 30-year time horizon. They found a “home equity first” approach (tapping home equity during the early stages of retirement) or a “coordinated” strategy (tapping home equity during down markets) was far more likely to sustain cash flow than the traditional “last resort.”
The use of home equity early in retirement reduces a major retirement risk: sequence of returns. Since home equity was used early in retirement instead of other less predictable assets, it had the effect of mitigating losses that otherwise would be locked in. As a result, it improved the chances of cash flow survival and leaving an inheritance.

This groundbreaking research led FINRA to stop referring to reverse mortgages as a “loan of last resort” in 2014 . Instead, FINRA advises investors to weigh all the options and use the proceeds of a reverse mortgage prudently. BDs need to at least allow advisors to discuss these strategies with their clients.

The third major change that will likely impact the use of reverse mortgages is the new focus of regulatory agencies on fiduciary/best interest standards. The DOL version of the Fiduciary Rule was recently vacated by a federal appeals court. However, the SEC has published their proposed version for comment, though the precise contours have yet to be finalized. Regardless, the financial industry has moved toward higher standards of providing advice whereby the client’s best interest is paramount. This presents a fundamental conflict with BDs that prohibit advisors from discussing reverse mortgages with clients.

Many BDs argue that their E&O insurance excludes reverse mortgages from their coverage. Herein lies the dilemma: how can an advisor meet the fiduciary standard without discussing reverse mortgages, especially given recent research which shows how certain strategies can help to produce sustainable retirement income? BDs and their E&O carriers need to adopt reverse mortgage rules that allow advisors to look out for their clients’ best interests. [2]
Compliance Concerns: The New Rules of the Road

Given the tectonic shifts that have taken place with reverse mortgages, the time has come for BDs to develop policies that support discussions with clients. The basic framework should contain several key principles :

  • Advisors will not use reverse mortgages to purchase investment products such as mutual funds or life insurance. An advisor who recommends doing so would be opening up a host of potential conflicts. The proceeds should be used to cover expenses or eliminate an existing mortgage.
  • Advisors will not recommend a specific product to a client, they will just discuss where to go for more information. The advisors job is to educate and point the client in the right direction, such as to the FHA website or to a reverse mortgage specialist. The advisor’s role should not go beyond that, just as they cannot provide legal counsel.
  • Advisors will not accept any fees from lenders. Monetary compensation is the brightest of red flags for compliance officers. Advisors should not receive any referral fees or commissions for recommending that a client consider a reverse mortgage.

The overarching theme here is that advisors need to act like fiduciaries when it comes to reverse mortgages . Just as I believe they have a fiduciary duty to discuss the reverse mortgage option in retirement income planning, they must do so in a way that makes the clients’ interests paramount. BDs need to acknowledge that reverse mortgages are a fiduciary issue and begin to adopt constructive policies that serve advisors and their clients.

Contributed by Curtis Cloke, CLTC, LUTCF, RICP, CEO and founder of Thrive University .
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[1] Barry and Stephen Sacks, “Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income,” Journal of Financial Planning , February 2012.
[2] Having read many E&O contracts, I believe there is some confusion regarding the exclusion on reverse mortgages. From what I have seen, I believe they often exclude reverse mortgage “sales” from coverage but do not limit financial advisors from providing information or advice. In fact, FINRA ( https://www.finra.org/sites/default/files/InvestorDocument/p517004.pdf ) recommends getting advice from a “trusted financial advisor” prior to agreeing to a reverse mortgage. Always check with your BD and compliance department regarding your specific rules.