Planners’ integrity cleared over reverse mortgages
No one could ever accuse Members Equity Bank’s head of workplace business Tony Beck of having done his research when he publicly warned consumers last month against being sold into reverse mortgages (RMs) by financial planners. Had he done so, he may not have derided planners for selling RMs solely to “pocket the commissions to build their businesses”. Even a rudimentary analysis by Beck of all the available sector statistics would have revealed the fallacy of his argument.
Instead, Beck based his accusation solely on a survey on the sector last month by researcher Trowbridge Deloitte, taking the results at face value and out of context. Commissioned by provider Bluestone Equity Release, the survey found 23 of 24 major financial planning dealer groups now have RMs on their approved product lists, many having done so within the past 18 months. This finding alone was seemingly sufficient for Beck to wade into planners for selling RMs to clients “against their best interests”.
Crucially, however, the research said nothing of the proportion of planners involved in the distribution of RMs relative to other distribution channels. It also said nothing of the extent to which dealer groups allow their planners to write RMs, or even the extent to which they actively promote RMs as a product. Of course, it also said nothing of the personal motives of those financial planners that do write the product, or of provider opinions on the subject.
The statistics, at least, were available for Beck through the Senior Australian Equity ReleaseAssociation of Lenders (Sequal), should he have chosen to consult it. Sequel released a survey last October, also conducted by Trowbridge Delloite, which revealed less than 3 per cent of a total 20,000 RMs in existence as at June last year were written by financial planners — or a grand total of 600. This compares with 57 per cent through the direct channel and 43 per cent by intermediaries, 40 per cent of which were brokers (and some accountants and solicitors). It begs the question why Beck directed his venom at planners alone.
Equally, a visit to Sequal executive director Kieran Dell himself would have dispelled Beck of the notion that planners are out to make a quick buck from RMs. Dell readily concedes planners are “not doing a lot of RMs at the moment”, although naturally he wishes it was otherwise,
Dell also pointed to the average size of RMs to reject Beck’s accusations, as did other sources approached by Money Management for this report. “Commission on the average RM loan of $53,000 would barely pay for two minutes of a planners’ time,” he said. “The fact is RMs are a solution for clients rather than a product planners are going to make money out of. Down the track it may be different, but right now there is no way you could accuse planners of jumping in to RMs to build a business out of them.”
One of the reasons planners have been “slow” to take up RMs, according to Dell, is because dealer groups have been “very, very cautious” in their attitude towards the product. “We have only now, over the past 12 months, started to see the dealer groups set up processes, including planner education and approved lists, for RMs. Two years ago, when I first started in the role, dealer groups and planners had a negative view of RMs. I know because they told me so.”
Another reason is RMs are not products that are regulated by the Financial Services Reform Act (FSRA), he said. “Planners have to come up with a different process to deal with them. Unlike for investment products, they can’t go down to van Eyk, for example, and get some research on a product and then just add it to their approved product list. Instead, they have to understand how a debt product works and also how they fit it into their advice process, which requires undergoing education.
Bluestone Equity Release chief executive Peter McGuinness also rejected Beck’s accusation on the basis that “less than 5 per cent” of the provider’s total business is written by planners. This is despite what he described as a “very significant penetration” of Bluestone product over the past 12 to 18 months among dealer groups. “As revealed by our survey (by Trowbridge Delloitte), the vast majority of the major dealer groups now have RMs on their approved product lists.”
McGuinness echoed Dell’s comment that dealer group caution is impacting on planner distribution of the product, rebuking Beck in the process. “Dealer groups have been very prescriptive in not allowing licensed representatives to abuse the use of RMs where it is clearly inappropriate,” he said. “We find they are spending a lot of time researching appropriate RM products for their approved product lists, but most importantly, researching appropriate strategies for selling RMs.”
The depth of research by the dealer groups suggests planners will become an “important contributor to overall RM volumes in the long-term”, he said. “We’d obviously like planners to be more actively engaged in the here and now, and for larger volumes to be flowing from them, but we understand the dealer groups’ cautionary sales approach. It’s a product that does need to have proper research and strategy behind it.”
As with Dell, McGuinness believes one of the challenges facing planners in distributing RMs as a debt product is they are used to dealing with licensed financial services products. “Do planners write mortgages — not typically.”
He added that the traditional inflexibility of RMs as a product had also served to limit planners’ distribution, although this too is changing. “Even two years ago, a traditional RM was a drawdown of a lump sum for a client’s immediate capital needs. From a planner’s perspective, there is not a lot they can do with that.
“All of a sudden, however, there are products available where you can drawdown income or cash flow over a 10-year period or more, and even set up flexible drawdown facilities. In effect, the product is now much more compatible with a financial plan than it used to be because it’s about long-term cash flows and long-term income.”
He predicts planners will also become more attracted to RMs as the average loan size grows. “That’s happening even now. Our average loan balance is well over $100,000, whereas traditionally it was less than $100,000.”
He conceded that writing a RM in complete isolation simply to secure the commission may not make financial sense for planners. “However, commissions are more attractive if sold within a financial plan, particularly the trail commissions, as these do have a much longer life than traditional mortgage trails, and are more predictable. On a single loan basis, the trail structure would be about $200 or $300 a year (on the sector’s average $50,000 loan), which isn’t particularly attractive. On a $100,000 or 200,000 loan, by contrast, it suddenly becomes about $1,000 a year, and it’s every year, and growing each year, because the loan balance is growing.”
Commissions are a “bit of a beat up” as a reason for the level of planner distribution, according to Chris Martin, managing director of provider Over Fifty Group (previously OFM). “These are in line with standard mortgage broking commissions,” he said. “My view is commissions are not overpaid or underpaid; they are probably about right.”
At the same time, he rejects Beck’s accusations as fundamentally inaccurate. “It stems from a misunderstanding of the commission structure associated with RMs. It also ignores the fact that the vast majority of planners are interested in doing the right thing by their clients.”
That most major dealer groups “now have a relationship with one or more RM providers is a sign that planners do expect to be selling RMs at some point in the future,” he said.
“The $64 million dollar question is how long they will take to write it and how much they will write. I expect a significant uplift over the next couple of years off a pretty low base, both in terms of how many planners write RMs and the volumes they write. Certainly, I do not think they will write any less than currently.”
He agreed that a reluctance for planners to get involved in debt-based products” is a reason for the channel’s low volumes. “Over time those barriers will fall down, however, partly because RMs are the first debt-based product that has a very broad application within the financial planning market.”
Another reason is that a “significant percentage of RM borrowers simply don’t have other assets, so they are not actually finding their way into planners’ offices”, he said.
Dealer group Collins House Financial Services only offers RMs to clients through its lending division, according to general manager Adam Adamczyk. “Our financial planners do not write any RMs at all, and rarely get to deal with a client requesting an RM. If needs be, they will explain to a client that there are RMs available through our lending division, and then refer the client on to the division — but that’s the full extent of it. It would be remiss of us to say we actually promote RMs through our planners.”
The dealer group considers RMs solely as an “additional tool in our basket of tools to assist customers who are not in a position to plan for retirement with substantial super and asset backing”, Adamczyk said. “We keep some RMs on our approved list more as a public service than anything else.”
His justification for this policy, if any is needed, is that there is simply not the monetary gain to justify a full financial plan for the client. The trailing income is such that a business couldn’t survive off it.
“By our calculations, the trail off a $20,000 loan would be barely $5 multiplied by 52 weeks. On a $20,000 minimum loan: an upfront commission, with no trails, is about $400 to $500.”
It’s not remuneration that motivates planner Liam Shorte to write RMs, but rather the opportunity for additional business that arises from doing so. He also holds onto a belief that planners should not discriminate against clients on the basis of the product they need. “I specialise in dealing with retirees, and with many of these people there is no other option for financing their expenses other than using some of the equity in their homes.”
Shorte is principal of Genesys-affiliated financial planning practice Pro-Active Advice, which has offices in Castle Hill, Sydney, as well as the Hunter Valley and Port Stephens. He’s an accredited mortgage consultant through the Mortgage and Finance Association of Australia (MFAA), a Genesys requirement for its authorised representatives who opt to write RMs. He’s also accredited with all of the RM providers on the dealer group’s approved product list, a further requirement.
Yet another motivation for Shorte to write RMs is a desire not to offend the accountants and - to a lesser extent - solicitors who generate the bulk of his client leads. “I’m hardly going to turn down a client of an accountant with whom I have had a long-term relationship on the basis that they are looking for a RM. If the accountant sees me taking care of their small clients, it builds up their trust in me that I will be able to take care of their larger ones.”
Shorte said “about half” of his cases involving an RM end up generating additional business, either from a client or somebody else within that client’s family. “You never know who is going to receive an inheritance, or whose son is going to become your next big client because you are taking care of a parent.”
The downside is that he “sometimes spends three hours with a client for a commission of about $5 an hour”. However, he copes with this by “focusing on the big picture”.
“If you have a lifetime relationship with the client, as we usually do, and you are dealing with their super, estate planning, insurances; then writing an RM works out as part of the service.
“Besides, you can’t just drop a client when it comes to the stage that they need to enhance the income they receive from an allocated pension or the aged pension. I very much believe if you take care of people you will come out best in the end. What goes around comes around, as the saying goes.”
It’s a point of view that Beck himself might want to embrace for the future.
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