Eight Easy Ways to Explain Financial Concepts to Clients

Some people understand investing. Others don’t, but want to do it anyway. They want to enter the market but don’t follow the concepts you are trying to explain. Sometimes it is necessary to compare investment concepts with day-to-day activities.


1. The logic of fully investing in the stock market. As an advisor, you know that the stock market can suddenly change direction. In other words, market timing doesn’t work. Your customers don’t understand why it’s impractical to sell everything now and buy it back when the market bottoms.

Everyday example: Have you ever been at the airport when your flight was delayed? The departure board said, “30 minutes delay due to maintenance issues.” The counter staff said, “Do not leave the gate area.” Why? Because the problem may be fixed within 10 minutes and boarding will resume! If you decide to go to the bar for a drink, they’ll probably be back at the gate after they’ve closed the plane door! You need to be present at the airport and the stock market in case something happens early.


2. Dollar cost averaging. This makes sense no matter what the stock market is doing, but it does make sense in volatile markets when customers are reluctant to put money into the stock market. You know the logic: if the market falls, your next investment will lower your average cost. If the market goes up, you buy some at a lower price. Your client doesn’t understand your logic of opening a position at an average price.

Everyday example: Buying gasoline for your car is an ideal example. Your car can only hold a certain amount in the gas tank. You probably always refill your tank mid-empty Saturday morning. You always buy about the same number of gallons. Some Saturdays cost more to fill up the tank, while others cost less. If you add up all your receipts and do the math at the end of the year, you’ll get the average price of gas you paid for that year. It should be better than those highs you complain about.


3. The Fed and rate hikes. Your client sees the Fed raising rates over and over again to slow the economy. They see the stock market reacting negatively. Their credit cards charge more because the balances they carry over have variable interest rates. How is the Fed slowing the economy?

Everyday example. You know that street in the neighborhood where everyone uses it as a shortcut? Traffic is speeding, neighbors complain. The local government has set up speed bumps. They put up signs announcing it. Traffic has to slow down because it hurts when you hit bumps at high speed. When you make more money, businesses do less business and the economy slows, just like traffic.


4. Pay the escrow currency fee. Your clients use professional money management in individually managed accounts. They pay fees based on the assets under management. Although they were happy with the results, they didn’t understand why they were paying the fee.

Everyday example: Your customers watch TV shows using a subscription service. They have several services. The average US user is said to have four subscription services. You pay a monthly fee. You can continue to pay for the subscription service as long as you intend to use the service and enjoy the shows. Once you decide to stop watching the channel, you can cancel your subscription and they will stop billing you at the end of the month. Working with a money manager is like having a subscription service.


5. Commissions and spreads. Buying stocks through advisors costs money, not municipal bonds. Why do I have to pay for one and not the other?

Everyday example: Consider buying wine and milk. Buying stocks is like buying wine. When you get to the cashier, you pay the posted price plus an additional fee, which is sales tax. Commissions for buying shares are additional. When you buy milk, there are no taxes, no extras. The store makes money because it buys milk wholesale, marks it up and sells it retail. Municipal bonds work the same way.


6. Why do you charge me when I can trade stocks for free elsewhere? Advisors offer a range of services aimed at building long-term relationships. This includes financial planning, understanding client risk tolerance, building investment portfolios and working with clients to monitor future performance. The activity of buying securities is only a small part of the relationship.

Everyday example: When discount airlines arrive, established major airlines need to stay competitive. They invented spin-offs. When you book through a major airline, you can often get prices that are comparable to discounted competitors. If you want to check your luggage, there is an extra charge. There is an additional fee if you want to assign seats instead of remaining seats. If you want to eat on the plane, there is an extra fee. The full-price product from a traditional airline is more expensive, but it includes the extras you want.


7. Why consider tax collection before the end of the year? If the taxman is your silent partner when you sell the stock and make money, it makes sense to seek their help when the stock doesn’t pan out. Clients may wonder why this can’t be done at the last minute between Christmas and New Year’s Day.

Everyday example: Many people save Christmas shopping until the last minute to buy gifts. The store is out. Prices are not attractive due to demand. There are crowds. It makes sense to think about tax losses because you do things dynamically throughout the year, just like you buy Christmas gifts throughout the year, and keep them in the “gift cabinet” until you need them.


8. Why do I need to pay to manage my funds? Why can’t this be done for free? The simple answer is that people don’t work for free. Even if you own an index fund, there are still costs. Advisors bring value to the relationship and should be paid.

Everyday example: Think broadcast television, the channels of the major networks. You have a favorite TV show. When TV was free, before cable, you could turn on TV and watch without paying, right? No, TV shows have commercials. Television production is expensive. Stations and networks cost money to operate. They brought in paid advertisers. Advertisers get ads and you pay with your eyeballs and your time. A 30-minute TV show has about 8 minutes of commercials. You spend money to manage your money, just as you spend it to have fun.

These simple explanations should help create some “aha” moments for clients and prospects.


Bryce Sanders is President of Perceptive Business Solutions Inc. He provides high net worth client acquisition training to the financial services industry.his book Attract wealthy investors Available on Amazon.

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