Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that FINRA has issued a proposal to allow broker-dealers to advertise hypothetical performance data to institutional and high-net-worth investors, which would bring the rules for broker-dealers largely in line with those for investment advisers, but also raises questions about the comparative roles and regulations for the two groups.
Also in industry news this week:
- A recent survey indicates that about 98% of clients are at least somewhat satisfied with their financial advisor and that an advisor’s ability to provide peace of mind when it comes to finances is a key driver of this satisfaction
- A study indicates that advisors can potentially boost client referrals by using client portals and by implementing financial psychology practices
From there, we have several articles on insurance planning:
- While many clients might be tempted to enroll in a Medicare Advantage plan, doing so can create potentially costly financial risks
- How seniors in several of the largest states will experience greater-than-average increases to their Medicare Part D premiums in 2024
- How advisors can help clients minimize IRMAA surcharges and appeal to have them reduced under certain circumstances
We also have a number of articles on client communication:
- The 7 communication practices that clients dislike the most and how advisors can avoid them
- Why avoiding technical jargon can facilitate better prospect and client communication and tactics to help advisors communicate more clearly
- Why empathy often beats sympathy for advisors when it comes to working with clients dealing with stressful situations
We wrap up with three final articles, all about the history of common financial products:
- How the current system of employer-provided health insurance benefits can be traced back to wage controls imposed during World War II
- How the private long-term care insurance marketplace has evolved over time, and why some states are considering stepping in to provide coverage to their residents
- How the 30-year fixed mortgage became dominant in the United States and how it is impacting housing affordability today
Enjoy the ‘light’ reading!
(Matthew Sellers | InvestmentNews)
For investment advisers looking to attract prospective clients on the basis of their investment acumen, advertising the performance of their investment strategies would be a logical way to market their services (at least if they had strong historical returns!). But for many years, advisers looking for guidance from the Securities and Exchange Commission (SEC) regarding what kind of performance advertising was permissible – without being deemed “misleading advertising” for inappropriately cherry-picked or otherwise non-representative results, especially in the case of back-tested or hypothetical returns – had to rely on fairly general guidelines and SEC staff statements in the form of “no-action” letters. But as part of its recently overhauled Marketing Rule (which also clarifies the rules surrounding investment adviser testimonials and endorsements), the SEC has codified its previous guidance regarding performance advertising into a single, fairly prescriptive rule, that does permit RIAs to market their investment performance… albeit including stringent restrictions on advertising hypothetical performance (e.g., limiting these advertisements to investors with the resources to independently analyze such hypothetical performance and the expertise to understand the risks and limitations of hypothetical performance) in an effort to protect less sophisticated investors from being drawn in by unrealistic return projections.
Nevertheless, because this rule applies only to investment advisers, broker-dealers have been left without a similar rule for advertising hypothetical performance. Which arguably made sense, because investment advisers can actually be in the business of managing client portfolios, while from a regulatory perspective, broker-dealers exist to facilitate the sale of investment products (where marketing has historically been more tightly regulated, for good reason given the obvious temptations of unrealistically optimistic sales illustrations). But now, broker-dealer self-regulator FINRA has proposed a rule that would allow brokers to advertise hypothetical performance to certain customers, including institutional investors and individual investors with $5 million or more in investible assets.
Under the proposal, broker-dealers using hypothetical advertising would be required to: adopt written policies to ensure communications are relevant to the financial situation and objectives of the investor; have a reasonable basis for the criteria and assumptions used in performance projections; disclose in communications that projected or targeted performance is hypothetical; and provide sufficient information to investors to help them understand the criteria, assumptions, risks, and limitations of using these projections in investment decisions. The proposal will now undergo a public comment period before being considered for approval by the SEC.
The proposed FINRA rule, while not exactly mirroring similar provisions within the SEC’s marketing rule, would bring regulations for broker-dealers (including hybrid RIA/broker-dealers, which are subject to regulation by both entities) largely in line with their investment adviser counterparts when it comes to hypothetical advertising, and would allow broker-dealers, for example, to advertise the projected performance of private funds (an opaque, but increasingly popular market segment) to their customers. However, while proponents of the FINRA rule note the investor protections it contains (e.g., limiting who can receive hypothetical return advertising), some consumer advocates worry that these restrictions might not be sufficient, particularly because broker-dealers are not required to abide by a full fiduciary standard in the first place. Or viewed alternatively, if broker-dealers want to be able to market like RIAs… perhaps they should simply be required to be RIAs (and subject to the rules and restrictions, including fiduciary obligations, that already apply to RIAs).
In the end, while the proposed FINRA rule would largely bring the rules surrounding advertising hypothetical returns for broker-dealers in line with those for investment advisers (at least if it is passed), it would still be up to FINRA to follow in the SEC’s footsteps when it comes to enforcing the rule (as the SEC has already imposed several fines against RIAs for misuse of hypothetical returns in advertising). Which means whether future advertisements contain reasonable assumptions and are limited to sophisticated investors, or whether unrealistic projected returns end up attracting retail investors who might not fully understand the associated risks (and relative likelihood of the advertised returns), will likely be a question of enforcement, not just the rule itself! Though at its core, the underlying question still remains: if the regulatory purpose of broker-dealers is to broker and deal in securities, while investment advisers are the deigned entity for the management of client portfolios, do broker-dealers really need rules to allow them to market on par with RIAs, or should they simply be required to become RIAs (and subject to the RIA's fiduciary standard) instead, making the FINRA proposal a moot point?
Financial advisors can provide significant value to their clients, not just in helping them grow their savings and have a financially successful retirement, but also in giving them confidence that their financial plan is built to weather the ups and downs of the markets and the broader economy. And a recent survey by asset manager Janus Henderson indicates that advisory firm clients are both broadly satisfied with their advisors and look to them for support that goes well beyond the technical side of planning.
According to the survey of investors with at least $250,000 of investable assets, 65% of respondents who work with an advisor said they were “very satisfied” with the quality of the relationship, while an additional 33% said they were “somewhat satisfied”. Notably, those who were very satisfied with their advisor were significantly more likely than other respondents to report that their advisor “provides peace of mind that I’m on track to reach my goals” and “cares about me as a person, beyond just my financial situation”, suggesting that beyond technical acumen, demonstrating care for clients and their concerns is a valuable practice for advisors (and can be a differentiator compared to robo-tools and other more impersonal sources of advice).
The survey also identified issues that were of most concern to respondents as they relate to their financial situation (which could give advisors an idea of the client questions they might face in the coming months). The top area of concern was the 2024 U.S. presidential election (cited by 78% of respondents), followed by inflation (67%), risk of recession (61%), rising interest rates (56%) and poor stock market performance (57%). Further, the survey found that respondents who said they were very interested in expanding their financial knowledge were more likely than others to be worried about the election and its economic implications, suggesting that advisors who can provide information that puts election-related concerns into context could boost their relationship with these clients.
Altogether, this survey indicates that financial advisory clients remain largely satisfied with their relationship with their advisor. Further, clients’ continued worries about the economy and broader political environment suggest that advisors who can address these concerns (perhaps starting by lending an empathetic ear) not only could help their clients avoid making emotionally charged portfolio changes, but also build the type of advisory relationship many clients are seeking!
(Josh Welsh | InvestmentNews)
Two key trends in the advisory industry in recent years have been the growth of available advisor technology tools (both in the number of tools and in the creation of new categories of AdvisorTech products) and an increased focus on financial psychology (with CFP Board adding this to the list of topics tested on the CFP exam). And research from advisor software provider eMoney suggests that advisors that incorporate these trends often have more satisfied clients who are more likely to refer others to their advisor.
When it comes to technology, eMoney’s research looked specifically at client portals, finding that 66% of clients have access to a portal, with about 30% of clients being frequent users. The top benefits of using a client portal cited by clients included allowing them to see all of their accounts in one place, saving time via automation, giving them a more holistic view of their entire financial picture, allowing them to communicate with their advisor more frequently, and allowing them to self-serve an explore without meetings. Further, the research suggests that offering a client portal can pay off for advisors as well, as 56% of clients who use a portal frequently said they refer others to their advisor 2 or more times per year.
In addition, eMoney tested 21 financial psychology actions, with those having the greatest positive impact on a client’s overall satisfaction including: helping clients identify meaningful personal financial goals and objectives; trying to understand the client’s values and priorities before delivering financial advice; always considering what the client values most in life; making an effort to learn about the client’s money behaviors and attitudes; and communicating recommendations in terms that the client can understand. Similar to the results for client portal use, the study found that clients who work with advisors who embrace financial psychology generate nearly 2.5X more referrals annually than clients of other advisors (further, the research found that advisors who incorporate both client portals and financial psychology see the best results).
In sum, this research suggests that adopting client portals and financial psychology practices not only is correlated with greater client satisfaction and loyalty (which could help improve client retention), but also could potentially help grow into the future through increased client referrals!
(Anna Wilde Mathews | The Wall Street Journal)
The arrival of Fall brings many traditions, from football season to pumpkin-spiced everything. One less-enjoyable (though perhaps even more prevalent) ‘tradition’ is the onslaught of advertisements for Medicare Advantage plans, which try to attract seniors during the Medicare open enrollment period that runs from October 15 through December 7 each year.
Medicare Advantage plans include their own version of Medicare Part A (coverage for hospital services), Part B (coverage for doctors’ services and other outpatient care), and, typically, Part D (prescription drug) coverage as well. In addition, these plans sometimes include dental and/or vision coverage not offered by traditional Medicare. The price of these plans is often lower than what a senior on traditional Medicare would pay for a Medigap policy (for expenses not covered under Parts A and B) and a Part D policy, making them attractive to seniors operating on fixed incomes.
Nonetheless, choosing a Medicare Advantage plan can come with several potential pitfalls. Perhaps the most costly is losing the ability to get a guaranteed issue Medigap plan (which supplements coverage under ‘traditional’ Medicare) if they eventually decide to leave their Medicare Advantage plan after an initial trial period. This is because for seniors who do not choose a Medigap plan during the 6-month Medigap open enrolment period (which starts the first month they have Medicare Part B and are 65 or older), insurers can use medical underwriting to decide whether to accept the individual’s application (meaning that seniors with a pre-existing condition might not be able to get Medigap coverage), though regulations vary by state.
In addition, those who choose Medicare Advantage sometimes find that the coverage network under these plans is not as extensive as they assumed and they might not be able to access their preferred providers (particularly if it is a Health Maintenance Organization [HMO] plan). Further, seniors will want to be aware of coverage limits within these plans, both for medical procedures and prescription drugs.
In sum, given the challenge of navigating the Medicare coverage environment (and properly analyzing the claims of Medicare Advantage plan providers), financial advisors can add significant value for their clients by helping them select the appropriate Medicare coverage for their specific needs, both initially and during the annual open enrollment period!
(John Manganaro | ThinkAdvisor)
While certain seniors will choose to retain the same Medicare coverage over the course of several years, the cost of this coverage changes annually. For instance, the monthly premium for Medicare Part B is increasing to $174.70 for 2024, up from $164.90 in 2023 (though higher income seniors subject to Income-Related Monthly Adjustment Amounts [IRMAA] will pay more), while the annual deductible for Part B will increase to $240 in 2024 from $226. However, while these Part B cost changes are applied nationwide, the costs for Part D (prescription drug) coverage can vary by state.
In fact, according to analysis from HealthView Services, while the average monthly Part D premium will actually fall slightly in 2024 (to $55.50 from $56.49 in 2023), seniors living in some of the largest states could see significant increases. The company found that seniors in California, Florida, Texas, New York, and Pennsylvania will experience an average monthly premium increase of between 42% to 57% (to $29.32 for low-end plans, $54.59 for mid-level plans, and $107.73 for high-end plans). The premium increases are possibly due to insurers hiking prices in advance of key provisions of the Inflation Reduction Act coming into force in 2025, including a new “catastrophic coverage” cap for out-of-pocket costs for covered medications of $2,000 (down from the 2023 cap of $7,050) and a requirement that carriers be responsible for 60% of 80% of prescription expenses above this cap (down from about 20% today).
Altogether, while the increased Medicare Part D premium costs for certain seniors might not be a severe imposition on wealthier clients, it could pose greater challenges to seniors with less available retirement income. But for all clients, advisors can play an important role during the ongoing Medicare open enrollment period (which runs through December 7) in helping them select Part D coverage based on their particular prescription needs and financial circumstances (and by recognizing that premium costs can vary for clients in different states)!
(Laura Saunders | The Wall Street Journal)
While some of the benefits for clients of working with a financial advisor are qualitative (e.g., the peace of mind knowing that they are on a sustainable financial path), retirement income planning (particularly as it relates to taxes) can be a way for financial advisors to show how they are saving their clients hard dollars on an annual basis. And when it comes to retired clients who are on Medicare, one area where advisors can potentially help save their clients money is on the Income-Related Monthly Adjustment Amount (IRMAA), a surcharge on Medicare Part B and Part D premiums for individuals whose income exceeds certain levels.
Because IRMAA amounts are determined based on an individual’s income from two years prior (e.g., 2023 amounts were determined by 2021 income), advisors can help their clients file for a refund (by submitting form SSA-44) if their income has changed during the past 2 years due to 1 of 7 approved reasons: death of a spouse, marriage; divorce or annulment; work reduction; work stoppage (e.g., retirement); loss of income from income-producing property; or loss or reduction of certain pension income (which means that one-time events like Roth conversions, taxable investment gains, or taxable gains on the sale of a vacation home typically are not acceptable reasons for requesting a refund). Nevertheless, individuals who saw a temporary increase in income for an extenuating circumstance (e.g., if an individual had to take a large IRA withdrawal to pay for unexpected medical expenses) could still receive a “reconsideration” by contacting the Social Security Administration (though this is by no means guaranteed). In either case, having proper documentation to corroborate the reason for reduced income can help the process move more quickly.
In the end, while, relative to the income levels it takes to hit IRMAA thresholds in the first place, IRMAA is really just the equivalent of a modest income surtax, it is often an acute pain point for many clients (particularly because the surcharge is typically taken directly from their Social Security benefits). Which means there are potential opportunities for advisors to add value (and gain client loyalty) by helping clients in certain scenarios (e.g., if they are very close to the next surcharge tier threshold or experience a “life-changing” event that leads to a reduction of income) to reduce (or eliminate) the Medicare surcharges they are required to pay!
(Samantha Lamas | Morningstar)
Discussions of financial advisor value often center on the services that advisors can provide, from helping clients create a sustainable retirement income plan to reducing their tax burden. But while advisors might be able to recognize the quantitative value they provide, recent research has found that a poor client service experience can eliminate much of the goodwill an advisor has built up through their technical acumen.
In the study, researchers from Morningstar asked advisory firm clients how they feel about a range of advisor behaviors as well as how each behavior effects their relationship with their advisor (in terms of trust, the decision to collaborate with the advisor, the decision to allocate assets to the advisor, and the decision to refer others to the advisor). With this information, Morningstar identified the 7 actions clients reported disliking the most. Topping the list was their advisor not providing a breakdown of fees, followed by tasks taking more than a week, use of financial jargon, investment recommendations that did not consider the client’s values, investment options suggested without going into details, being asked to complete long forms, and not providing holistic advice. Further, the researchers found that investors who experienced a disliked behavior were discouraged from trusting and recommending their advisor, as well as more likely to invest less or leave the advisor.
The study found that more than half of the clients surveyed experienced each of these 7 behaviors with their own advisors, suggesting that many advisors might be (most likely unintentionally) hurting their client retention and growth through one or more of these practices. To remedy the situation (or avoid doing so in the first place), the authors suggest first using a checklist before and during meetings to ensure they address the most-disliked behaviors and, after the meeting, sending clients a follow-up survey (that can be completed anonymously) that subtly asks clients whether they experienced any of these advisor behaviors.
Ultimately, the key point is that it can often be valuable for an advisor to step back and consider not just what information they are communicating to clients but also how they are communicating these messages. And by avoiding certain key behaviors disliked among clients, advisors can potentially avoid a slow deterioration in their client relationships and instead encourage client loyalty (and, perhaps, greater referral activity)!
(The Smoke Stack)
Financial advicers tend to be experts at the craft of providing financial advice, armed with significant expertise across a range of planning areas and able to address the needs of their clients. But given the amount of time advisors spend in the nitty-gritty of planning (from learning new tax planning techniques to considering how best to leverage Monte Carlo simulations), it can be easy to slip into using industry jargon when meeting with clients, which could leave them feeling confused (at best) or frustrated with their advisor (at worst).
One method for using less jargon with clients is for an advisor to plan what they want to say ahead of time; by running through the topics to be discussed, they can anticipate whether jargon, acronyms, or other potentially confusing language might be used. If the advisor will be joined by a colleague in the meeting, they can have the colleague ask the advisor to stop and explain potentially confusing terms that do arise during the meeting (as the advisor might not catch it themselves). Perhaps most directly, an advisor could start a meeting by telling the client or prospect that they will try to avoid using jargon and inviting them to interrupt at any time if they would like something explained further.
In addition to using technical jargon, it can be easy for advisors to slip into extended explanations of how certain planning processes or financial products work, which could bore a client or make them feel like they are being talked down to. Advance preparation can be a salve for this tendency as well, including considering the client’s technical acumen and whether they enjoy in-depth discussions or prefer to get to the bottom line. Further, if the advisor finds themselves spending a significant portion of a meeting going deep into technical topics, it might be a sign that they are not providing enough time for the client to ask questions or air their concerns.
In sum, while financial advisors have much to offer when it comes to planning skill (and might be eager to explain the details of the work they have done on behalf of their client!), using industry jargon with clients and monopolizing client meetings can lead to frustration for clients. But by identifying potential trouble spots in advance, understanding each client’s knowledge and preferences, and reserving an appropriate amount of time during a meeting for the client to talk themselves, advisors can increase the chances that both they and their client will find their next meeting to be a success!
(Megan McCoy and Sonya Lutter | Rethinking65)
When a friend or loved one experiences a challenging situation (e.g., a job loss or the death of a family member), expressing sympathy (i.e., feeling sorry for them, perhaps by sending a card or saying “I’m sorry for your loss”) can come naturally. However, demonstrating empathy (i.e., the ability to understand what someone is feeling) is often the better course of action to demonstrate understanding and professionalism (in the case of an advisor-client relationship).
For instance, take a client who simultaneously experiences the loss of a parent and the receipt of an inheritance. An advisor taking a sympathetic approach when meeting with this client might express their condolences and then proceed to explain the best way to use the inheritance (without necessarily taking the client’s current emotions under consideration). On the other hand, an advisor using empathy might give the client space to express how they feel about the situation and their preferences for the inheritance. For example, rather than mingling the inheritance with their other assets, the client might want to keep the money in a separate account so that when it is spent, they remember that it came from their parent. This empathetic approach can not only demonstrate the advisor’s understanding of the client’s situation, but also could lead to a more satisfying course of action for the client.
Advisors have a variety of ways to show empathy, which psychiatrist Helen Riess has summarized in the (appropriately named) acronym EMPATHY: consistent Eye contact, Muscles of facial expression (i.e., smiling when possible, rather than demonstrating annoyance or boredom), Posture (i.e., sitting at the same eye level as a client to avoid taking a ‘superior’ position), Affect (i.e., being ‘present’ and listening for cues of sadness or fear), Tone of voice (i.e., matching the client’s tone when possible), Hearing the whole person (i.e., imagining how the incident impacts the many parts of a client’s life), and Your response (i.e., looking for feedback from the client to determine whether the advisor’s response was appropriate). Together, these practices can put an advisor in a better position to demonstrate authentic empathy with a client.
Ultimately, the key point is that empathy is often a superior approach to sympathy when working with clients dealing with challenging situations. Further, an empathetic approach that seeks to understand the client’s pain (rather than actually feeling it themselves) can help advisors (who might be working with many clients experiencing stressful situations) keep the focus on the client and avoid experiencing mental stress and potential burnout themselves!
(Dylan Scott | Vox)
Many companies are now in the midst of (or perhaps just completed) their annual open enrollment season, a time when employees can elect to change their health insurance coverage and certain other benefits. And while it might be easy to take for granted that one’s health insurance will come through their employer (as 57% of Americans under age 65 get insurance through their jobs), in reality this employer-centric approach was less of a purposeful policy choice, but rather the result of a series of measures enacted nearly a century ago.
As standards of medical care advanced in the late 1800s and early 1900s, individuals started to pay more for the (higher quality) care that they received. This led some employers during the 1920s and 1930s to offer health insurance for hospital-based medical services (as doing so created large enough ‘pools’ of participants to spread out the risk to insurance companies and allowed them to collect premiums from a single payer [participating companies] rather than from each employee). However, the employer-based provision of health insurance really took off during World War II when the Federal government established wage controls, which led some companies to compete for talent by offering health insurance; by 1950, enrollment in some kind of health insurance grew to 142 million people from just 20 million people 10 years earlier.
This approach was further boosted in 1954 when a law was passed enshrining the tax deductibility of health insurance benefits (benefiting both employees, who do not owe income tax on employer-paid health insurance benefits and for the employers, who can deduct the cost of these benefits) and health insurance reforms since then have largely worked around the employer-based model. Nonetheless, the employer-based model has potential downsides, including the potential for health insurance benefits to ‘lock’ an employer into their job if they might not be able to find equivalent coverage (at a similar cost) for their needs elsewhere.
While politicians and activists across the political spectrum have argued for a variety of changes to the current system (from reducing government-imposed requirements for health insurance policies to having the government be the sole provider of health insurance), the employer-based health insurance model continues to dominate for working-age Americans and their families. Which presents a range of opportunities for advisors to add value for their clients, from reviewing their coverage each year (and determining whether changing policies might be appropriate) to helping them assess the full financial implications (including health insurance benefits) of a job change or early retirement!
(Jordan Rau and JoNel Aleccia | The New York Times)
As Americans have started to live longer, so too have their needs for health care as they age. But while Medicare covers many of seniors’ medical expenses, it does not provide extensive coverage for long-term care needs, such as an extended stay in an assisted living or nursing care facility. Which, given the potentially significant costs of this care, has led many individuals to purchase Long-Term Care (LTC) insurance policies to defray (at least some of) these costs they might incur down the line.
Initially, insurers were able to provide coverage at competitive rates, but their actual claims experience ended up in significant losses for these companies, which then raised premiums, tightened eligibility, and/or limited benefits (with some providers dropping out of the marketplace altogether), leading to a challenging environment for those looking to buy a policy today. At the same time, even those who purchased older policies face challenges, from a lack of coverage for increasingly popular options like in-home care or policies with inflation adjustments that might not have kept up with the cost of care. Which, together, leaves many individuals reliant on Medicaid to cover their LTC needs (after drawing down most of their assets).
Given the challenges of providing cost-effective LTC coverage in the private market, some Federal and state legislatures have tried to step in to support those with LTC needs. Federal efforts – including the CLASS Act, which was repealed in 2013, and the WISH Act, which was introduced in 2021 – would have provided daily cash benefits for those with LTC needs, but have failed to gain traction in Congress. In the absence of Federal support, Washington state has created its own LTC program (and other states are considering similar programs) that will provide benefits to residents who pay into it through a payroll tax (though the maximum benefit of $100 per day might not cover all LTC expenses for many individuals).
Amidst this challenging environment, financial advisors can support clients in funding potential LTC needs and protecting their assets in a variety of ways, from explaining their potential LTC exposures (as clients might not recognize the likelihood that they will need LTC services or their cost) to exploring the range of potential solutions based on their unique circumstances (from finding an LTC policy in the private marketplace to hybrid life insurance/LTC alternatives to using a Medicaid Annuity to self-insuring)!
(Ben Casselman | The New York Times)
When looking to finance a home purchase, many buyers instinctively look for a 30-year fixed mortgage, the most popular type of mortgage used by Americans today. Given this loan style’s ubiquity, one might wonder how it came to dominate the mortgage market (especially because similar loans are rare in other countries, which typically have mortgages with adjustable rates and/or shorter terms).
In the 1920s, many mortgages had terms of 10 years or less and were not self-amortizing (i.e., monthly payments did not include a payment for principal, leading many borrowers to take out a new mortgage to pay off the old one at the end of the original loan’s term). But when the Great Depression hit and banking markets seized up, many borrowers were no longer able to roll their mortgage over into a new one and foreclosures became increasingly common. In response, the Federal government created the Home Owners’ Loan Corporation and the Federal Housing Administration to create a system of insured, fixed-rate long-term mortgages that could be sold off to investors. Other contributors to the expansion of long-term fixed-rate mortgage availability included the G.I. Bill (which expanded and liberalized the mortgage insurance system) and the rise of mortgage-backed securities (which let investors diversify their risk across thousands of mortgages, though the 2007-2008 financial crisis showed that these securities could still be risky). Amid this backdrop, 30-year fixed-rate mortgages became dominant, with the product representing nearly 95% of existing mortgages today.
While there are numerous other options (e.g., 15-year fixed-rate mortgages, adjustable rate mortgages), the 30-year mortgage can benefit buyers in several ways, from lower monthly mortgage payments compared to shorter mortgage terms (although borrowers typically will end up paying more in interest expenses over the term of the mortgage with the longer term) to having a known, fixed monthly payment no matter the interest rate or inflation environment (with the further benefit of being able to refinance to a lower rate if interest rates decline).
Nonetheless, when interest rates rise, the omnipresence of long-term, fixed-rate mortgages can make current homeowners reluctant to sell their homes, as those needing a mortgage to purchase a new home would very likely end up paying a higher rate. This phenomenon is in full force today, as while current mortgage rates are well above 6%, many homeowners who bought their house or refinanced before the rise in rates have mortgages around 3%, which has likely contributed to a more than 15% reduction in sales of existing homes in the past year (to their lowest level in a decade), as current homeowners resist selling (and giving up their current relatively low-rate mortgage). Which has created a challenging environment for many first-time homebuyers, as they face both higher initial financing costs (given the higher interest rates) and continued elevated home prices (given the limited available home supply in many markets).
In the end, while the 30-year fixed mortgage has benefited many homebuyers over the decades, it has the potential to skew the broader housing market by ‘locking in’ many current homeowners into their homes. And in this current environment, advisors can help clients looking to buy a home explore the options available to them to potentially defray the cost as well as support current homeowners (at least those with mortgages with relatively higher rates?) in deciding whether to pay down their mortgage early.
We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!
In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog.