Putting Clients First is No Longer a Slogan with Fiduciary Rule

Shannon Hicks April 30, 2016 1

The Implications for Financial Professionals Warrant a Second Look


It’s one of the biggest game-changers for financial professionals: the expanded definition of a fiduciary by the Department of Labor under the ERISA act. The rule extends beyond those managing assets to include those giving investment advice for a fee or other compensation.

What does this mean for financial professionals?

  • Transactions involving ‘qualified’ retirement plans are covered by the rule (IRAs, 401(k)s, etc)
  • Expanded definition of fiduciary goes into effect April 2017
  • Increased disclosures of costs & fees when moving money from one company to another
  • Insurance-based products will be under increased scrutiny
  • Advisers should present all options that are in their client’s best interests

Home Equity Warrants Consideration

reverse mortgage newsAccording to the U.S. Census Bureau, the typical married couple entering retirement has $92,000 in non-equity assets and $192,000 in home equity. With that in mind does it really make sense to advise a client to sell securities in a down market to maintain their retirement cash flow without mentioning home equity?

In Jamie Hopkin’s recent article in Investment News Hopkins says “Far too many financial advisers overlook home equity as part of a retirement income plan. With heightened regulatory concerns about doing what is in the best interest of the client, it would be prudent to explore and discuss home equity strategies with clients.”

Consider a client over age 62 with $300,000 in home equity. If the market is down 25% is it truly in the client’s best interest to sell stocks at a loss without at least considering what may be their largest asset? Such oversights could potentially raise red flags in the future.

Reverse Mortgages, Not a Silver Bullet but a Potential Tool

The Home Equity Conversion Mortgage (HECM), better known as the reverse mortgage, is an FHA-insured mortgage for homeowners 62 or older which allows them to access a portion of the equity in their home without requiring monthly mortgage payments.

One strategy touted in several financial publications is the ‘standby reverse mortgage’. This approach allows the homeowner to secure a HECM line of credit. This credit line is unique in that the unused portion grows each year, no payments are required and the credit line cannot be frozen or reduced if housing values were to fall as long as the borrower meets the ongoing obligations of the loan.

Utilizing the ‘standby reverse’ strategy one could access a portion of the HECM line of credit to meet income needs in years when the market is down allowing the portfolio to recover. A great way to overcome sequence of returns risk. Several Monte Carlo simulations have shown this approach to substantially increase the longevity of the portfolio and sustainable withdrawals.

Hopkins wrote in his recent article “Although a fiduciary standard might not explicitly touch on housing wealth, there will be added regulatory muscle to consider all of a client’s available assets in the development of their specific plan.”

Articles on “Standby Reverse Mortgage”

Journal of Financial Planning
Advisor Perspectives
Investment News

The information provided in this article should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are strictly those of the author.

One Comment »

  1. James E. Veale, CPA, MBT May 2, 2016 at 1:28 pm - Reply

    Shannon states: “Advisers should present all options that are in their client’s best interests.”

    But that is not a requirement based on the DOL summary of the new fiduciary standard at: http://www.dol.gov/ebsa/newsroom/fs-conflict-of-interest.html

    The DOL summary states: “Firms and advisers will be required to make prudent investment recommendations without regard to their own interest.”

    An advisor is not required to present all options but to the extent that any investment recommendations are made, they must be prudent “without regard to their own interest.”

    So what is the need for advisers to add reverse mortgage scenarios to the advice they are already giving? It seems anecdote once again rules our world. Started by a professor and others in our industry, are we going to have mud on our faces for telling financial advisers that they must do something when there is not requirement to do it? By the way if there is no plan or IRA that DOL regulates in which the client is a beneficiary or participant, does the fiduciary rule even cover those situations? On a first reading, the answer is no.

    An even bigger question is whether DOL will consider any advice based on increasing the debt on the principal residence of the participant or beneficiary to be prudent. That is not a given and should not be considered fact until DOL tells us what prudent means in this context. Even after reading the rule itself and information that seems pertinent from recognized authorities, it is hard to believe that anything that results in more debt to the participant or beneficiary will initially be considered “prudent.”

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