Three Questions to Determine Value
I recently received an email from a financial wholesaler who didn’t believe that reverse mortgages had any practical value for the advisors his team served. As you may have gathered, I often find questions to be a more powerful tool than simply spelling out the answer, so I responded with these three questions:
Many advisors have this same sentiment. They might phrase it differently, but it all comes down to the same thing: Does incorporating housing wealth into my practice help my bottom line?
Four Ways Advisors Are Compensated
I’m often asked if an advisor can earn a commission or be paid a fee for originating or referring a reverse mortgage. The simple answers are yes and no. Before I explain this, let’s explore how advisors are generally compensated, so we can better understand how reverse mortgages seamlessly integrate with the four ways advisors make money.
The Money You Manage
For advisors who manage investments, helping your clients’ savings last as long as they live is a key challenge. One of the most common dangers to their savings accounts is asset erosion (often due to inflation), premature or ill-timed withdrawals, or simply beginning their retirement at the wrong time and experiencing sequence of returns risk.
Building a volatility buffer can be an efficient way to mitigate the more common risks of retirement and avoid premature asset erosion. By implementing Housing Wealth concepts, you may be able to keep more assets under management longer–leading to greater retirement outcomes and tremendous client satisfaction that you would not otherwise be able to achieve apart from the reverse mortgage.
The Products You Sell
Annuities, life insurance, and long-term and linked benefits insurance all have their place in a comprehensive retirement income plan and they all require clients to have either a lump sum of cash or a stream of dollars to fund the premiums. Where can an advisor find clients with both?
The benefit of understanding and incorporating reverse mortgages in your client conversations is that it will give you the strategies to identify existing and new clients who have access to cash and income to fund premiums, without ever using the proceeds of a reverse mortgage to accomplish it!
The Clients You Keep
Competition among advisors is fierce, and client attrition can pose a danger even for the most experienced advisor. Keeping your clients engaged and encouraged is one way to retain them. Another is helping them use the assets they already have to create greater retirement security.
When an advisor helps a client create cash flow, reduce risks, insure assets, increase liquidity, or add new dollars back into savings, that advisor becomes invaluable, and their client loyalty goes through the roof.
The People Your Clients Tell
When clients are satisfied, or even stunned by what their advisors have accomplished, they’ll gladly share their retirement success story with their friends and family. As I mentioned earlier, only 16 percent of baby boomers have a written financial plan. Opportunity is ripe for advisors to serve this aging population by helping them optimize their retirement income plans.
Can Advisors Get Paid for Transacting Reverse Mortgages?
Back to the pertinent question: can an advisor be paid a referral fee or earn a commission for reverse mortgages?
No, an advisor cannot be paid a referral fee for simply sending a client to a qualified reverse mortgage loan professional (this is a violation of the Real Estate Serving Procedures Act), but yes, an advisor can be paid for transacting a reverse mortgage loan.
To do so, an advisor needs to either (a) become a W2 employee of a federally chartered banking institution or (b) pass a National Mortgages Licensing Services (NMLS) proficiency test, pass the state-specific test, obtain a sponsor, and register with the United States government as a loan originator. Either of these ways allows advisors to earn a legal commission.
What’s the Best Course of Action?
Although advisors can become loan originators—and several of my advisor friends have at one time or another pursued this—my strong recommendation after twenty years of practice is that they focus on using the skills they have spent years honing and allow those who specialize in reverse mortgages to assist them in helping existing clients and identifying new ones.
I have found that advisors who focus on their craft but have a network of specialists to call as needed tend to not only be the most successful in serving their clients, but also generate the most revenue.
What Can Reverse Mortgage Proceeds Be Used for?
Another question that sometimes arises: Can advisors use the direct proceeds from a reverse mortgage to purchase an annuity, equity, mutual fund, or some other investment?
The short answer is that your clients can choose to do whatever they want with the proceeds of their reverse mortgage. However, nearly all insurers, broker dealers, state banking and insurance commissioners, and organizations such as FINRA, the SEC, both houses of Congress, and the CFPB have shown tremendous concern when advisors take the direct proceeds of a reverse mortgage and invest them in annuities or equities.
I have learned that this is not necessary for advisors who understand how housing wealth works.
A Tale of Two Advisors: When Knowledge Gained Is Revenue Earned
Let’s focus on two advisors, both of whom represent the same products and carriers. They both visit the same sixty-two-year-old, married couple; one goes in the morning and the other in the afternoon. The clients identify themselves as having $300,000 in an investment account and $150,000 in cash, CDs and money markets. They are looking for better retirement outcomes without too much risk or exposure.
The first advisor meets with the clients and leaves with nothing.
The second advisor shares the same company and carrier stories, brochures and presentations, but she leaves with
- $50,000 to be added to the assets under management
- $100,000 policy for fixed income
- 1035 exchange for an old annuity
- Life insurance contract
Same clients, same products and presentations, but two very different results.
What was the difference? The variance was the second advisor knew the questions, concepts, stories, and strategies to incorporate housing wealth into the dialogue, while the first advisor did not. Furthermore, she was able to accomplish what she did without using the proceeds of the reverse mortgage. She served her client in a way that was legally, ethically, morally, and responsibly as a fiduciary, as well as 100 percent compliant.
Here’s what happened.
Client’s Home: $400,000 | Mortgage Balance: $60,000 | Monthly Payment: $550
The client obtained a HECM that provided $160,000 in benefit. This paid off the $60,000 mortgage and freed up $550 in monthly payments for the next fifteen years. Additionally, the HECM provided a $100,000 reserve that grew at 5 percent.
Advisor Engagement
- The client’s liquidity concern is met with the use of the $100,000 growing line of credit.
- Now they can reposition the $150,000 they held in cash/CD/Money Market into vehicles that have better yields: $50,000 into assets under management and $100,000 into a fixed income product.
- The $550 of liberated mortgage payment dollars can now be used as premium replacement dollars for a life insurance policy with a long-term care rider.
- The investment account remains preserved from premature erosion (and even strengthened).
You see the difference? Housing wealth is an integrative, knowledge-based strategy designed to change retirement outcomes. The advisor who incorporates this will find sufficient opportunity to preserve assets and generate additional revenue in ways that are legal, ethical, moral, and compliant without ever having to use the direct proceeds of the HECM to accomplish it.
Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®
Latest posts by Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA® (see all)
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