Some people understand investing. Others do not but want to do it anyway. They want to be in the market, but do not follow the concepts you are trying to explain. Sometimes, investment concepts need to be compared with everyday activities.
1. The logic of staying fully invested in the stock market. As an advisor, you know the stock market can change direction suddenly. Put another way, market timing doesn’t work. Your client doesn’t see why sell everything now and buying it back when the market has bottomed is impractical.
Everyday example: Ever been at the airport when your flight has been delayed? The departure board says: “30-minute delay because of a maintenance issue.” The counter agent says: “Do not leave the gate area.” Why? Because the problem might get solved in 10 minutes and boarding will resume! If you decided to go to a bar and have a drink, you might get back to the gate after they shut the aircraft door! You need to be onsite, both at the airport and in the stock market, in case things happen early.
2. Dollar cost averaging. This makes sense regardless of what the stock market is doing, but it really makes sense in volatile markets when clients are hesitant to commit money to the stock market. You know the logic: If the market goes down, your next investment brings down your average cost. If the market goes up, you bought some at a lower price. Your client doesn’t get the logic you are building a position with an average price.
Everyday example: Buying gas for your car is an ideal example. Your car only holds a certain amount in the tank. You might always refill on Saturday morning when your tank is half empty. You always buy approximately the same number of gallons. Some Saturdays it costs more to fill your tank, others less. If you added up all your receipts at the end of the year and did the math, you would get the average price you paid for gas that year. It should be better than those high points you grumbled about.
3. The Federal Reserve and interest rate hikes. You client sees the Fed raising rates over and over to slow the economy. They see the stock market reacting negatively. Their credit cards are charging more because the balance they carry forward has a variable interest rate. How is the Fed slowing the economy?
Everyday example. You know that street in a residential neighborhood everyone uses as a short cut? Traffic speeds through and neighbors complain. The local government puts in speed bumps. They put up signs announcing it. Traffic must slow down because it hurts when you hit a bump at high speed. When you make money more expensive, businesses do less business and the economy slows down, like the traffic.
4. Paying managed money fees. Your client uses professional money management in separately managed accounts. They pay a fee based on assets under management. They do not see why they should be paying this fee, although they are satisfied with the results.
Everyday example: Your client uses subscription services for watching programs on TV. They have several services. It has been said the average American user has four subscription services. You are paying monthly fees. You keep paying for the subscription service as long as you are intending to use the service and enjoy the programming. Once you decide you don’t want to watch the channel anymore, you can unsubscribe and they stop charging you at the end of the month. Working with a money manager is like having a subscription service.
5. Commissions vs. spreads. It costs money to buy stocks through an advisor, but not municipal bonds. Why do I have to pay on one, but not the other?
Everyday example: Consider buying wine and milk. Buying stock is like buying wine. When you get to the register, you pay the posted price plus something extra, the sales tax. The commission to buy stock is the something extra. When you buy milk, there is no tax, no something extra. The store makes money because it buys the milk at wholesale, marks it up and sells it at retail. Municipal bonds work the same way.
6. Why can I trade stocks for free elsewhere, but you charge me? Advisors provide a range of services with the intent of building a long-term relationship. This includes financial planning, understanding the client’s risk tolerance, building a portfolio and working with the client to monitor performance in the future. The activity of buying the securities is a small part of the relationship.
Everyday example: When the discount airlines arrived, the established major airlines needed to remain competitive. They invented unbundling. When you book an airline ticket with a major carrier, you can often get a price comparable to the discount competitor. If you want to check luggage, that costs extra. If you want a seat assignment instead of what’s left, that costs extra. If you want food in flight, that costs extra. The traditional airline’s full price product is more expensive, but it includes the extras you want.
7. Why should I consider tax loss harvesting before the end of the year? If the taxman is your silent partner when you sell at stock and make money, it makes sense to get their help when a stock hasn’t worked out. Clients might wonder why this can’t be done at the last moment between Christmas and New Year’s Day.
Everyday example: Lots of people save their Christmas shopping for presents until the last moment. Stores run out. Prices are unattractive because of demand. There are crowds. It makes sense to consider tax lost harvesting something you do dynamically during the year, much like you would shop for Christmas presents during the year, putting them away in the “present closet” until you need them.
8. Why do I need to pay to have my money managed? Why can’t this be done for free? The simple answer is people don’t work for free. Even if you owned an index fund, there would still be costs. The advisor brings value to the relationship and deserves to be paid.
Everyday example: Think about broadcast TV, the channels from the major networks. You have favorite TV shows. When TV was free, before cable, you could turn on your TV and watch without paying a fee, right? No. The TV program has commercials. The TV series cost lots of money to produce. The stations and the networks cost money to run. They bring in advertisers who defray the costs. The advertisers get commercials, which you pay for with your eyeballs and your time. A 30-minute TV program has about eight minutes of commercial time. You pay to have your money managed, like you pay to be entertained.
These simple explanations should help create some “aha” moments for clients and prospects.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book Captivating the Wealthy Investor is available on Amazon.