Two words that will change your practice foreverArticle added by Rodney Ballance on October 8, 2012
Rodney Ballance

Rodney Ballance

Branson, MO

Joined: September 22, 2011

If the public understood just two little words and how to implement these words in their own personal economies, the financial institutions would suddenly become irrelevant in our society.

Why do many advisors try to make personal finance so complicated these days? Is it because we have a need to be the only ones who seem to really understand issues, thereby giving the public a greater perceived value of what we offer? Or is it because we don’t want the public to truly understand the most basic truths about financial issues?

I believe that we’ve made the whole idea of personal finance complicated to the point of confusion for everyone. Banks, insurance companies and investment firms understand the basics, but tremble at the thought of this information being leaked to consumers.

If the public understood just two little words and how to implement these words in their own personal economies, financial institutions would suddenly become irrelevant in our society. These two little, but ultra-important words are “margin” and “arbitrage.”

The entire financial world operates on these two words, but we rarely, if ever, hear them mentioned in routine conversation around the water cooler, or at parties and other social functions. I know, how boring would those parties be, right?

The main point of this article is to help agents and advisors better understand how to simplify financial issues for their clients. If you could sum up the entire financial and economic world for someone in two words, wouldn’t that be much easier than trying to explain strategies like “be your own banker” and other economic theories we use every day?

When trying to educate a client, start with this: "The first word I need to make sure you fully understand is 'margin,' aka 'spread.' This term simply refers to the difference between what it costs you to have access to money and your return on investment.

"If you acquire money from a particular source and have to pay 2 percent interest for access and then you loan it to someone else at 5 percent, you have created a 3 percent margin or spread. Everything above the cost of access is profit for you."

Isn’t that an easy way to explain an often complicated concept?

Now, let’s address “arbitrage.” If you were to view the above strategy on a graph, you would see the cost of access at the bottom of the graph and the return on investment at the top of the graph. Arbitrage simply describes the line where your rate of return intersects the line representing your cost of access.

Once you cross that line representing your cost, everything above that should be profit. Wouldn’t your clients like to start seeing profits and understand how to take advantage of them? I know this is a simplistic view, but sometimes we need to get back to basics and stop allowing the world to be so confusing.

If people can see you as someone who simplifies the complicated, they will seek you out more often and tell others about you. After all, isn’t that what we all want?
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