Reversing the view

Chris Martin

Reverse mortgage products are here to stay in the financial planner’s toolbox.

But the big question is: can a planner make money out of these products?

Not surprisingly, there are those who believe the planner can and those who say reverse mortgages are just a service.

Macquarie Mortgages division director Tim Brown believes in these early days of reverse mortgages they won’t make a lot of money for advisers.

However, he pointed out trails would increase as the loan grows and not decrease as with traditional mortgages.

“One thing to remember is the reverse mortgage loan trail will appreciate, as it is an asset that is building if the adviser takes a long-term view,” he said.

“They won’t make much money in the first year, but in the seventh, eighth, ninth and 10th years they will make a lot of money.”

Brown says the average balance at present on a reverse mortgage is $64,000, but he is confident that will grow in future years as more people use the product and take more equity out of the family home.

Over Fifty Group managing director Chris Martin also believes advisers will make money out of reverse mortgages.

“Advisers can make money out of reverse mortgages, despite people saying otherwise,” he said.

“Advisers not making money is a major misconception that people have been putting about regarding reverse mortgages.”

Martin said reverse mortgages have a broad appeal among older clients and it is a product they want.

Most reverse mortgage originators offer both upfront commissions and trails, and the adviser has the choice of rebating either or both of the payments.

The upfront commissions are usually between 2 and 2.5 per cent.

“That is a fair level of commission for a relatively simple exercise,” according to Martin.

The commissions are also creating value for a practice, especially if the owner is looking to sell in a few years.

“They can take the upfront commission, and that is creating volume which will be included in the valuations if they sell the practice,” he said.

“The trails are usually between 50 and 70 basis points, and this is on a loan that is increasing.

“So we are paying on a growing loan balance, which means it is a growing income stream for the adviser.”

Industry consultant Paul Resnik, who has advised a number of reverse mortgage organisations, agreed advisers can make money out of the products, but he sees them more as a service for clients.

“It is one way for the financial planner to help meet the fiduciary obligations of certain clients,” he said.

“Reverse mortgages are a tool that is an option for some clients.”

Resnik said reverse mortgages can show clients what can be achieved with the release of money from the family home.

“If the adviser has more tools to work with for the client then there is a better client experience,” he said.

“Therefore, reverse mortgages are more a service rather than a money stream for a practice.”

Brown said there is also the opportunity to provide advice that can be charged as an extra fee.

“It is a product that will need to be discussed with the client, and that means they will need advice,” he said.

But he warned there may be a period of time before achieving the sale of the product, and how that is paid for will be up to the individual adviser.

Resnik also warned the commissions may not cover the cost of providing the advice necessary to sell the product.

“If they rebate the commission, then the agreed fee may not cover all the activity required for the sale of the mortgage,” he said.

“I see home equity release as an additional tool, and it needs an explanation on how it will meet the client’s needs.

However, there are other opportunities with reverse mortgages for the adviser.

“If the adviser takes up the opportunity to work with the children, that will become an investment for the future of the business,” Brown said.

“It can put a lot of new clients on the books and bring in a lot of business.

Martin says bringing the children into the decision-making process may not always be possible.

“I think we have to be a little circumspect with saying children will become clients,” he said.

“I don’t think involving the children should be mandatory, but in terms of opportunities, there is a potential for them to become clients in the future.”

Another way of using reverse mortgages to bring in new clients is to run seminars on the products.

“We do see brokers who run seminars on reverse mortgages and this is a cost effective way of getting to groups of potential clients,” Martin said.

“It is usual to have 20 to 30 people at each event.”

Holding seminars also reinforces the idea that reverse mortgages are part of a lifestyle planning approach rather than just a product selling income stream.

Martin said planners looking at offering lifestyle planning must then also include the family home as part of the asset portfolio when making decisions about the client’s financial future.

“I take a simple view that understanding financial planning is looking at lifestyle, and this has to include the largest amount in their portfolio, which is their house,” he said.

“For the financial planner, it is about using the largest asset to provide solutions from the use of their entire investment portfolio.”

Martin said reverse mortgages help the client achieve the lifestyle they aspire to, especially in retirement.

“So helping them release equity in the home will enable the client to top up their retirement income for the lifestyle they want,” he said.

“We know 9 per cent superannuation is not enough to help people maintain their lifestyle in retirement.

“Superannuation is only a partial solution for retirement.”

This leads the debate about reverse mortgages back to a service for older clients who want to maintain a certain lifestyle but don’t have the instant funds to achieve it.