In this Swift Chat video conversation, Marie Swift of Impact Communications, Inc. speaks with Phil Walker, who is with the Retirement Strategies Division at Finance of America - Reverse. The two talk about how financial advisors can reduce portfolio risk for their clients who need consistent income streams during retirement - especially during down markets - by tapping alternative sources of income (in this case, tapping their home equity via a reverse mortgage).
Learn more about unlocking the power of home equity for your clients -- and earn CEUs at:
Download the white paper co-authored by Phil Walker and published by the Journal of Financial Planning at:
I see this quite literally as a strategy that pulls not just risk but stress out of being retired and worrying about is that portfolio going to do everything I needed to do and make it all the way to life expectancy and beyond."
Transcript of Conversation
Marie Swift: Well, hello everybody and welcome back to another Swift Chat. Today I'm joined by Phil Walker and Phil is with Finance of America - Reverse. I'm so excited to talk about this new study, Phil, that you have undertaken. It was just published by the Journal of Financial Planning and by the time this comes out, everybody will be talking about it, reading about it.
But before we get into the study and what it means for advisors, introduce yourself and tell us a little bit about who you are, your role at Finance of America Reverse and what brought you there.
Phil Walker: Sure. Thank you. I am Phil Walker. I'm the Vice President of Strategic Partnerships for the Retirement Strategies Division of Finance of America - Reverse. We focus on planning applications where reverse mortgages are appropriate for the planning customer and Finance of America itself is the largest wholesale provider of reverse mortgages in the United States, has been for 11 years now.
So as far as my background, I started out long ago as a financial advisor with Merrill Lynch. Spent some time with Morgan Stanley Smith Barney back when they were Morgan Stanley Smith Barney, and later transitioned to the reverse space and eventually the research side of things. Started with a paper some years ago called the Boomer Effect that warned the wealth management industry of a problem that's really gaining some traction right now, which is Pre-retirees in your book of business that are suddenly getting impacted with having to help parents with long-term care expenses.
That was kind of my entree into the research world and then there was a paper back in 2012, published in the journal that made a discovery around a withdrawal strategy that happened to use reverse mortgages. You could actually use any alternative income source, but for most Americans, the easiest one to access to do this strategy is using a reverse mortgage. I spoke on it literally for a couple of years, FPA national conference, FPA chapters all over the country and various events to really just amazed reception, but yet wealth management firms hadn't really engaged it yet.
I was kind of contemplating one day why on a flight home and it occurred to me that this strategy it is so impactful. It significantly grows portfolios over time and it's just a withdrawal strategy that you can layer on top of any existing retirement plan. It's ideal by the way, for the mass affluent client.
If you can increase growth that much, it's really significant over time, but you make no changes to the portfolio holdings something had to happen to risk, like something really significant. I reached out to the original study authors, and I said this is what I believe. All my training as a financial advisor there has to be some give and take with risk and I think it's really significant, this is why. I kind of laid out my case and they said, yeah, I think you're onto something, let's go down that path. So, our first mission was to identify what type of risk are we impacting? It turns out its volatility. This strategy yanks volatility out of a retirement plan significantly and then it was to quantify how much, and to our amazement, it was a factor of 10. It really pulls out the impact on volatile markets to a retiree’s retirement.
Groundbreaking Risk Paper Co-Authored by Phil Walker
Swift: So, you were instrumental in this groundbreaking paper and again, anyone who's watching this Swift Chat or listening to this Swift Chat can access it through the Journal of Financial Planning, their section on the FPA website, and you don't have to be an FPA member to access it. It's free and open to all.
The title of this, I'm just going to read it out loud: To Reduce the Risk of Retirement Portfolio Exhaustion Include Home Equity as a Non-Correlated Asset in the Portfolio. This is really important work, I think, because times have changed, right? The reverse mortgages of the past, the annuities of the past, whatever today's fiduciary advisors may be thinking about some of these traditional solutions.
They been evolved, they've been modernized. One of your jobs Phil is to help financial advisors understand this power of home equity and how that can play a part in their client's financial planning strategy, their retirement strategy. So maybe you could just talk a little bit more about how you think about risk reduction and home equity as another tool in the fiduciary advisor’s tool belt.
Walker: Sure. In the study we identified that essentially what you're looking for is to use an uncorrelated asset, an uncorrelated income source following down markets, right. So, it's a ridiculously simple strategy when it comes down to it, it's very simple following a down market. Instead of drawing the next year's income from the portfolio, leave it alone for a year and instead draw income from an alternative source.
There are some clients who you are going to have that maybe they are an author or something. They have book royalty revenue or something like that, or maybe a real estate investor and they have a significant real estate income or something in place, but for a majority of the mass affluent they tend not to have that, just some other source of income lying around.
As it turns out, tapping into home equity through the tool of a reverse mortgage is the easiest way for most of them to do it and the least expensive way for them to do it. That simple process of taking the gas off of, you know, the stress off the portfolio for a year, all it's doing is leaving as much money in the portfolio as possible to benefit from the rebound and we know from over 200 years of markets, right? That there's always eventually a rebound.
In 2008, we wondered is this the time there isn't going to be and look where we are today, right, historic market highs. So, by allowing just simply leaving as much money in the portfolio as possible to benefit from the rebound, and the client typically having exposure to these events like four usually five times max, over their life and retirement. This buffer asset as we call it of where you're drawing this income from, in this case, a reverse mortgage ends up just significantly impacting and compounding effect down the road. So, if you're late in retirement, you're thinking about, will this benefit me? We looked at that.
Two skips later in retirement has a great benefit. The most benefit is going to be skipping early in retirement, falling down markets and of course, if you do it throughout retirement you get this massive result that elongates, enables the portfolio to last longer. For those that aren't worried about running out of money it opens up an opportunity to do something more than just maintain lifestyle.
They could give themselves raises, potentially, that they hadn't initially planned on or enhance their philanthropy or their legacy goals can all make improvements by simply adding the simple withdrawal strategy.
Swift: Who are the other two co-authors to this risk paper?
Walker: Dr. Barry Sacks, PH.D., J.D; and Dr. Stephen Sacks, PH. D. They happen to be brothers. They were the co-authors of the original study in 2012 that discovered the withdrawal strategy itself and then, like I said, it took me a couple of years of presenting it to all of a sudden make the discovery, wait a second, something major had to happen here regarding risk and that resulted in the paper we have today.
A Win/Win for Both the Client and the Advisor
Swift: So let's just agree to call Finance of America - Reverse "FAR" from here on out, right. It's simpler to say FAR than it is to say the full company name. So, with FAR, I know that you are dedicated to helping advisors understand how homeowners and home equity can play a part in their retirement planning with their clients.
It also occurs to me that this was a win/win for the advisory firm as well. We don't want the clients to withdraw their portfolios when it's not great timing, but also, I'm thinking about the impact to the advisor's practice, to having engaged clients, to have something different, to speak with them about other than just portfolio performance, to actually have them see, their children see, that there is a holistic financial planning conversation happening and it's not just stocks, bonds and money market funds. Would you have a comment around that.
Walker: I think ultimately the first thing we in the planning community need to recognize is this is really a paradigm shift. It's a paradigm shift from the axiom that all debt is bad in retirement.
This proves otherwise. The strategic use of this particular tool, because reverse mortgages are very, very, very different than traditional mortgages. They're a completely different animal when you understand how they function differently and then integrate now how they can be used in retirement planning appropriately. You can just really enhance the outcome, but not just the outcome of bigger portfolios, better cash flow, but what that ends up meaning holistically to the client and the client experience. I see this quite literally as a strategy that pulls not just risk but stress out of being retired and worrying about is that portfolio going to do everything I needed to do and make it all the way to life expectancy and beyond.
It really reduces stress and following a down market and any advisors watching this, you'll remember this. I certainly do when I was in practice. When there's a big market sell off, you start getting those phone calls, what should we do? What do we need to do? You get the worried clients. I think for the majority of them it’ll be a little bit different going forward. It'll be, hey is this going to be the year that we take a draw from the reverse mortgage instead of the portfolio. Totally different conversation because they knew that there was a plan for the down market.
Swift: I'm also thinking about the children of the current clients that most of our advisors serve. My children are probably wondering, hey Mom and Dad, what are you going to do about long-term care? Have you thought about that? What's going to happen for the future? Are you going to have enough money? Something like this could be helpful in that multi-generational conversation, whether you're mass affluent, or maybe even a little higher on the spectrum of affluence.
Walker: Absolutely. There was a study a few years back that said that 70% of the US population falsely believes that their health insurance will pay for long-term care and that was kind of the genesis of my first paper that I authored the Boomer Effect and warning wealth managers that your client may have a plan for long-term care funding, but their parents might not and that could end up impacting your client. If they have to help a parent with a six-figure annual expense.
As we start reaching out it just provides that holistic opportunity for advisors to reach out to the aging parents. Reach out and start engaging the young adults and say, here's how we can help everybody through this process. Mom and dad might be perfectly fine with their existing goals, but what if we could reduce risk and enhance their retirement even more?
Finance of America - Reverse (FAR) and the Financial Planning Association (FPA)
Swift: That sounds good to me. Let's talk in the final minutes that we have are about some of the other resources and tools that FAR and the team provide in the retirement strategies division. I know that you're the official, is it the official educator, tell me what that is with the FPA, the relationship that you have.
Walker: We're a core cornerstone partner to the FPA National and essentially what that means is we're the official provider of reverse mortgage education to the FPA. We are going on to our third year now in that relationship with them so it's been very successful. We have a great relationship with them. Speak at most of their events now and provide webinars and other content.
The other thing we're doing as outreach to help the advisor community understand how engaging home equity the right way can enhance retirement plans is we've created HomeEquityU.com and HomeEquityU currently is going to go through a significant expansion, but it already has quite a few CE credit webinars that you can register for on there and get CE credit for CFPs. We plan on enhancing it pretty significantly in the coming year. Hopefully bringing that to a lot more content.
Swift: I'm just curious if an advisor wanted to run scenarios within the total financial plan. Are there any calculators that work with this?
A Calculator to Run Financial Scenarios
Walker: There is, and we have a proprietary, for lack of a better term software, that allows us to take the reverse mortgage and give a 30 year plan so that it if they want to take future draws we can plug that in and see what that would look like. How that would impact a payoff at any point down the road and ultimately provide the data that the advisor needs in order to see how this impacts legacy goals. What do they want to leave behind to their heirs and those sorts of things because without a payoff number at any given point you really have to guess. You don't have a good feel for that. We have the software to enable advisors to get that information.
We currently use it and provide it on request. Provide the data and we're working hopefully later this year to roll out something that advisors could potentially have direct access to. So that's coming in the future.
Implications for the Fiduciary Advisor
Swift: Fabulous. Any final words of wisdom before we wrap up today? What would you encourage advisors to think about at this juncture?
Walker: Well, the first would be read the study and if you do, by the way, if you're an FPA member and you read the study, they've actually attached to CE credit benefit to that. Answer five questions and you can get a credit towards your CFP. Then lift it up to your compliance departments and make sure they're aware because on a firm level this is being compared to modern portfolio theory and the concepts of reducing risk through asset allocation and diversification.
It's long since been established that those are things that we should be doing. Now you can add a withdrawal strategy that significantly reduces risk even further which obviously has some fiduciary implications. I would get ahold of the study from the FPA site and get it to your compliance departments and engage as soon as possible.
Swift: Fantastic. In the show notes we're going to add a link to the website, and this is a site developed especially for financial advisors. I encourage any advisor who's listening or watching this Swift Chat to visit. I'm not going to read it as it’s too long, but it'll be in the show notes and you can always Google FAreverse.com and then financial advisor. That’s how I found the link and of course go to the FPA website, the Journal of Financial Planning, and just put in the names. Would they put in your name, Phil Walker? Would that bring it right up probably.
Walker: For FPA members, there'll be a link right on the homepage to access the study and then we were given something they don't normally do, but they created a public URL that I can give you for the show notes.
Swift: Great. We'll put that into the show notes. So be sure to read the risk paper and then to consider how this can benefit your clients and also your practice. That would be what I would add as a footnote here.
I'm just going to be considering this as I go through this aging stage of my life with aging parents and young adult children. I think that this could be an eye-opener for many families. I thank you very much for the time to spend with us today and to help educate us about this important topic and also for the work on the study.
It's quite impressive. It is probably a little bit over my head, after all I'm a PR and Marketing person, not a financial planner, but I am sure all of the financial planning experts are going to eat up all that data and the proof that you have behind the assertions.
Walker: We're here to help the compliance departments digest this and kind of answer their questions and help them through it also.
Swift: Very Good. Well, with that, I bid you a fond farewell thank you again for your time today.
I think ultimately the first thing we in the planning community need to recognize is this is really a paradigm shift. It's a paradigm shift from the axiom that all debt is bad in retirement."