While reverse mortgages seemed to have attracted at least grudging acceptance from the rest of the population, they have yet to receive an endorsement from one crucial segment: financial planners. Due to a combination of misunderstanding, lack of expertise, and knee-jerk aversion, it seems that financial advisers and their ilk are reluctant to recommend reverse mortgages to their clients. Let’s explore this issue in greater detail.

Many Americans are effectively house-rich and cash-poor, which means that the majority of their wealth exists in the form of home equity, while other savings and assets are minimal. This phenomenon was exacerbated by the financial crisis, which devastated investment portfolios and retirement accounts across-the-board. This problem is especially acute for borrowers nearing retirement, because they will need to start drawing on these funds soon, whereas younger borrowers still have time for their investments to recover.

Anecdotally, it seems that financial planners were caught unawares by this scenario: “On the whole, advisers should have seen this coming and should have been adopting a more holistic financial plan for consumers where the family home and the retirement options were included. Cash flow, not asset wealth, is the problem many retirees are now facing and this is a result of having a financial plan that does not look at the whole picture,” said one critic. Many clients are now at the point where piecemeal solutions probably aren’t appropriate.

While reverse mortgages would seem to represent a solution to the house-rich / cash-poor problem, financial planners are loathe to recommend the product. Because the product is still somewhat niche, there has not been a big push to educate those not directly involved in the industry. Those with the strongest understanding of reverse mortgage are naturally the brokers/lenders and the HUD-approved counselors. Having not been told otherwise, financial advisers see reverse mortgages as a negatively-amortizing variable-rate loan that gradually erodes one home equity, and understandably tell their clients to steer clear.

Unfortunately, they don’t seem to realize that for borrowers that are determined to remain in their homes but lack the cash to do so, there are very few other viable solutions. “Financial advisers have been missing in action from retirement planning and this attitude needs to change. By leaving out the family home in the majority of financial plans, advisers have ignored 70 per cent of an individual’s wealth,” summarized one industry insider.

For this to change, the industry itself needs to educate financial planners in both the benefits and drawbacks of reverse mortgages. Certainly, reverse mortgages do entail some risk, and involve substantial costs; these concerns can and should be factored into the decision. However, financial planners that wish to fulfill their fiduciary duties to their clients should take the time to at least make them aware that the option exists. While the result might not necessarily be a boon for the industry, it will at least serve to eliminate misconceptions and help advisers to help their clients make informed decisions about managing their finances.