Lastly, I want to bring up an ethics issue. I have attended many continuing education sessions over the years in which a case study of unethical behavior revolved around an “advisor” recommending that a client tap the equity in his or her home to buy an investment product.
Investing borrowed money is not in and of itself an ethics violation. The facts and circumstances determine whether a reasonable strategic choice has been made or if we are talking about predatory sales. It also depends on how the choice was presented.
Using a reverse mortgage to preserve an investment portfolio may make good sense. But if the mortgage is not presented for what it is—higher cost debt—or if it is presented as something free or cheap because of its lack of required servicing payments, the advisor may be crossing a line.
Reverse mortgage products are not all bad or always bad to use. They have improved, and I think they can be used effectively more often with those improvements. Our friends in the academic community are helping us identify some of the possibilities.
Nonetheless, they are a complex form of debt that needs to be managed and comes with a cost. It will take smart strategic use of these mortgages to benefit clients.