Worlds Collide: Is 2016 the Year for Reverse Mortgages & Financial Advisers?

Although reverse mortgages withstood significant changes over the past year, they’ve also gained a few allies in the financial planning sector—several of whom see increasing opportunities for the reverse mortgage and retirement planning worlds to intersect in 2016.

A slew of financial planning research and commentary last year helped add some extra credibility to the reverse mortgage product. Bolstered by new program tweaks and new consumer protections, reverse mortgage press coverage ranged from calling them retirement’s “best bet,” and even “saving grace.”

Aside from RMD coverage, a fair share of the articles touting the benefits of reverse mortgages came from financial advisers, retirement planners and even a Nobel laureate. Such increased attention could even be an early indicator of the shrinking communication gap between the reverse mortgage industry and the financial planning world.

“There are several signs in the air that the world is starting to get a little different,” said Tom Davison, a certified financial planner and special projects coordinator with Summit Financial Strategies, Inc. in Columbus, Ohio.

Davison co-authored a paper last year with Keith Turner, an Ohio-based reverse mortgage adviser with Retirement Funding Solutions, describing the various strategies in which a reverse mortgage can be used in retirement planning. The paper, which was published in the The Journal of Retirement in November 2015, also detailed the effectiveness of reverse mortgages in helping retirees increase their portfolio longevity and spending horizons over the course of a lengthy retirement.

Davison’s initial interest in reverse mortgages dates back only a couple of years. While he admits he did know a little about the product, it wasn’t until Davison looked at the reverse mortgage line of credit and the growth it could produce decades into the future that he realized there is a “tremendous amount of potential” for the product within the context of retirement planning.

“That was pivotal—realizing the growth of the cash that was available in the line of credit 20-30 years later,” Davison told RMD.

He’s not alone. The line of credit is largely responsible for winning over many planners, advisers, and other experts—one of whom recently changed her mind about reverse mortgages completely.

“We’re seeing an increase and awareness for the use of home equity, including reverse mortgages, in the financial planning industry,” said Jamie Hopkins, associate professor of taxation at The American College of Financial Services in Bryn Mawr, Pennsylvania. “Planners refined to the retirement income planning—that group of planners are now very interested in the effective use of home equity.”

Apart from his professorial role, Hopkins also serves as the co-director of The American College New York Life Center for Retirement Income, and oversees the college’s trademarked Retirement Income Certified Professional (RICP) program. As opposed to the common Certified Financial Planner (CFP) designation, where Hopkins notes very little is taught about the strategic uses of reverse mortgages, the RICP is one of the few designations that actively teaches advisers how to systematically use reverse mortgages in retirement planning.

The RICP also teaches advisers about the most recent updates to the Home Equity Conversion Mortgages. Through the program, Hopkins estimates that two years from now thousands of more people will have learned about reverse mortgages. But simply knowing is simply not enough. Reverse mortgage professionals also need to acquaint themselves with the financial planning community. And that means being able to speak planners’ language.

“The reverse mortgage world needs to start understanding how the retirement income planning world works,” Hopkins said. “Far too often I talk to reverse mortgage specialists and they don’t know how reverse mortgages fit into retirement income planning. There needs to be an understanding on both sides so the industries can have good communication.”

Like many in the general public, financial planners also harbor their own misconceptions of reverse mortgages. But there are opportunities to bridge the knowledge gap in 2016, including the need for more joint research between advisers and originators, Hopkins said—similar to the Davison-Turner efforts mentioned earlier.

Diverse attendee mixes at conferences that invite more advisers to reverse mortgage events (and vice versa) also presents a great opportunity for industry crossover, he added.

While some advisers may have looked into reverse mortgages in the past prior to the most recent series of program changes, and have not yet bothered to revisit them, others may still be turned off as a result of perceived high costs and the loan of last resort reputation, said Wade Pfau, principal and director of retirement research at McLean Asset Management in McLean, Va.

“A fiduciary planner has to look out for the best interests of their clients,” Pfau said. “As a side effect, the best interests of the planner can be served through research that shows how the legacy value of assets can be improved by a reverse mortgage.”

Pfau, who is also professor of retirement income at The American College, serves as a member of the Funding Longevity Task Force, a group of financial planners established in 2013 by reverse mortgage industry veteran Shelley Giordano. One of the major focuses of the Task Force is how the strategic use of home equity can add value to retirement planning. It was through the Task Force, after having attended one of the group’s meetings, that Pfau began to look at reverse mortgages differently.

Last year, he published a paper in the Social Science Research Network titled “Incorporating Home Equity into a Retirement Income Strategy.” In the paper, Pfau highlights six different methods of using a reverse mortgage in retirement planning and how they impact spending and wealth for retirees.

Like much of the recognition from the financial planning community, Pfau’s research emphasizes the effectiveness of using a reverse mortgage line of credit, a feature he says is still widely misunderstood by advisers.

“An issue that nobody understands is how the line of credit is able to grow over time,” Pfau told RMD. “They don’t understand how there can be value.”

Pfau plans to address this issue in a forthcoming piece that will be published in the Journal of Financial Planning this March. That article, he said, will provide simple examples to explain both why the credit line grows and how this feature can be a value to the consumer.

For advisers, reverse mortgages offer a new opportunity for education and a way for them to search for new clients, Pfau said, especially given the recent changes to Social Security that take effect this year.

“Social Security claiming has kind of lost its momentum with the changes to the program last year,” he said. “If I had to predict what the next hot topic is going to be, I’d say reverse mortgages—for advisors to both seek education and use them as a way to drum up interest among potential clients.”

But, considering home equity and Social Security are the cornerstones of many people’s retirement wealth, advisers may no longer be able to plead ignorance on reverse mortgages and how they fit into an effective income planning strategy.

“There is going to be more attention paid to reverse mortgages because home equity and Social Security are the biggest assets for most Americans,” Pfau said. “It’s really in the adviser’s best interest to learn about reverse mortgages and do their due diligence on them.”

Written by Jason Oliva

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