In our collective quest to reinvent the HECM market, we must dig deep within ourselves to find the courage to try something new. We know it is crucial that we reach the clientele traditionally not served by our industry. We agree that change is necessary to ensure a sustainable HECM program. Yet new referral partners, new studies, new vocabulary and new client needs all require us to amend our established routine. This change can be very difficult to undertake even though the desire is there. Why the reluctance to make the change? In particular, why is there a hesitance in engaging financial planners on a professional level?
Randy Pausch, the famous Carnegie Mellon University professor and author of The Last Lecture, understood that change often provokes inertia and even fear. He was known for awarding stuffed penguins to students who took the biggest chance, regardless of the outcome. In addition, the professor memorialized the “First Plunge.” He acknowledged how reluctant we may be when first in line to try anything new. Just think about the penguin that dives first into dark, deep, frigid waters, not knowing what dangers may await him. No wonder many of us are on the sidelines, content to watch others take that first plunge into the financial planning community.
We understand our own hesitation, yet may not empathize with a similar reluctance on the part of financial advisors. We know that there is a growing body of evidence suggesting that the housing asset provides a credible buffer to early portfolio depletion in the retirement distribution phase. Yet time and again, we leave a meeting with a financial planner whose interest has been piqued without a referral for a HECM Saver line of credit to help his clients ride out volatility troughs. We can be discouraged when financial planners do not act on the growing evidence that home equity can enhance their retirement distribution planning.
First, let’s take a look at what work has been done to prove that housing wealth conveys portfolio protection.
For many years, Barry Sacks has been investigating the selective use of home equity draws in turbulent market conditions to assure cash flow survival. He published a seminal study, along with Stephen Sacks, in The Journal of Financial Planning in February 2012 proving that hackneyed media advice is unequivocally wrong. His math destroys the notion that a “wait and see” approach makes sense. Financial planners, he proves, are misguided if they plan to
In August 2012, in the same publication, Harold Evensky, John Salter and Shaun Pfeiffer published their innovative approach to portfolio survival. These investigators verified that a “standby” HECM Saver line of credit will impart many benefits. For example, the non-cancelable line that grows automatically without regard to future home values should be attractive to many retirees. With the onset of the low-load Saver, financial planners can create a three-bucket retirement strategy without disagreeable upfront cost. This approach provides maximum portfolio protection with a payback to the line when the portfolio rebounds, thereby protecting home equity as well.
Jack Guttentag, the “Mortgage Professor” and professor emeritus of the University of Pennsylvania, publishes often on the misunderstandings that cling to the HECM program. Particularly adept at describing mortgage terms and idiosyncrasies (as you might imagine from his moniker), the professor is almost militant in his assertion that the program suffers an undeserved bad reputation. For example, he calls for HUD to improve community outreach to those whose information channel has been limited to biased and misguided news reports. He states that there “are millions… whose lives would be enriched with HECMs who haven’t taken them.” Guttentag says the reason they haven’t is that they are either unaware of the program’s existence, or they are aware of it but their impressions of the program are based on poor information:
-Negative media coverage from ill-informed writers that stokes fears of losing one’s home
-Lack of support from consumer organizations whose attitudes toward HECMs range from ambivalent to hostile
Interestingly, professor Guttentag advocates “insuring” access to one’s home equity by setting up a line of credit early in retirement:
“Millions of seniors retire with a modest nest egg that they intend to use up during their retirement years, but face the risk that their funds will be fully depleted while they are still alive. They may follow the advice of a financial planner who tells them how much of their fund they can draw each year consistent with a low probability of running out of money. However, a low probability of going broke can be a source of continued anxiety.
A standard remedy for anxiety associated with low-probability hazards to life, limb or pocketbook is insurance. In this case, the insurance is provided by the federal government with the HECM/reverse mortgage program. But the senior must use the program properly… A HECM can be used to insure against running out of money by electing a credit line for the maximum amount available.”
Finally, a revered thought leader in financial planning and accounting circles, Michael Kitces, is touring the country with a fresh look at reverse mortgages. Mr. Kitces echoes the work done by the previously mentioned investigators and also extols the unique feature a reverse mortgage offers someone wanting to leverage home equity. In a HECM, the homeowner is not required to deleverage what he is leveraging by having to make monthly payments.
And what about HECM for Purchase? Are we at last getting some traction on this revolutionary FHA purchase-money program? Perhaps so, judging by the two articles published recently in the Wealth Management Journal and Kiplinger. The articles feature circumstances in which the HECM for Purchase solved a problem. In both cases clients were reluctant to bury so much of their savings into the home, but had very specific reasons why they needed the opportunity to buy a particular home. The HECM for Purchase clearly cracked the code.
This loose coalition of powerful thinkers, coupled with positive studies about HECM for Purchase potential, has caused many of us to sense some positive momentum. Though we are certainly not at the proverbial tipping point, there are some green shoots suggesting a change for HECM in financial planning. But we have a long way to go. Financial planners are just not willing, on a significant scale, to take the first plunge.
This reluctance is even more frustrating when juxtaposed against a recent survey commissioned by Ameriprise. Its results assert that 47 percent of respondents plan to use home equity to help fund their retirement.
Now this is a mismatch if ever there was one. Clients hire planners to help make sure there is enough money to last the entire retirement span. Many fully expect that their home equity will come into play to achieve that goal. Yet, for the most part, they read that they should use their homes as a last resort, a strategy proved to be the very worst way to use home equity if liquidity is the goal. And many planners, even if they may be aware of housing wealth as an antidote to early portfolio exhaustion, seem reluctant to use this strategy.
As professionals working to partner with financial advisors, let’s gain some understanding as to why this change, so obvious to us, is difficult for planners. We can thoroughly empathize with the natural human tendency to avoid change, but what we may not know is how a financial advisor may have been trained.
I challenge you to ask this question the next time you are lucky enough to have a conversation with a financial advisor. Go ahead, ask. Ask him how debt and housing were treated in his training. He may respond that he was taught to eschew all discussion of debt in retirement. And he may respond that he was trained to absolutely ignore the home as an asset!
No wonder we are working so hard for referrals. We must understand that we are asking financial advisors to break the cornerstone of their own training.
Rather than get frustrated and give up, let’s show a little heart. The looming boomer generation will be making its way through retirement for many years to come. They need us to help their trusted advisors explore alternatives to conventional retirement planning. This change is going to be tough; the individual financial planner may show some reluctance. But rather than give up, think of professor Randy Pausch, who stated in his last lecture, “Brick walls are there for a reason. They give us a chance to see how bad we really want something.”
With thanks to Michael Truitt and HERS Bill Evans.