The Financial Industry Regulatory Authority (FINRA) regulates broker-dealers and their registered representatives. Over 10 years ago, FINRA issued a few investor alerts and notices regarding the use of mortgage funds for investment purposes. Here are the direct links:
As you can tell by reading the notices, FINRA does not prohibit broker-dealers or their registered representatives from using mortgage proceeds or the savings from mortgage refinancing for investment purposes. In fact, FINRA encourages its member broker-dealers to establish sound practices to ensure that:
- The strategy discussed with the client must be suitable for the clients’ risk tolerance, liquidity, cash flow and net worth situation. For example, you shouldn’t recommend that a widow with no savings utilize the cash from a reverse mortgage to invest in the latest variable annuity plan.
- The strategy discussed with the client must be prudent and should not contain the risk that the client will lose their home if the investment doesn’t meet projected returns or loses value. For example, if mortgage financing is used to help a client increase their liquidity or boost the value of their children’s college savings plan, the client needs to be able to afford the mortgage payments regardless of whether the investment strategy makes money or loses money.
Mortgage decisions are inherently financial in nature, impacting a client’s tax and cash flow situation. In fact, it could be argued that ignoring mortgage options or excluding home equity from a retirement plan could cause financial planners to run afoul of the recent government regulations (see my article titled, How the Fiduciary Rule Impacts Mortgage Planning). Please contact me for more information.