Even a seasoned financial advisor can be vulnerable to certain blind spots within the field, what matters is recognizing and learning from these blind spots. Here we have gathered a list of the seven major areas in which advisors can falter, to save you from the same oversights.
1. Forgetting Time Value of Money
As an advisor, the time value of money must be applied to every calculation, and any calculation that does not take this into account is not accurate. Every dollar has a value that increases over time, or in other words, accrues interest. A common blind spot for financial advisors and clients is forgetting to account for this interest. Time value might seem minor with interest rates as low as they are, but when a cumulative sum is plugged into a calculation it loses all accuracy because the interest value is lost.
Interest rates vary depending on the scenario—whether money is being socked away into savings, paid in premiums to an insurance policy, or otherwise—but they are always necessary to include. Regular calculators don’t do a good job of applying the time value of money, which is why interest rates are often overlooked by advisors but Truth Concepts software makes the calculations of interest rates simple and makes the projections you show your client accurate.
2. Having Unequal Time Frames
It is all too easy to fall into the trap of comparing mortgage rates with unequal time frames. As with any scientific experiment, when comparing two things you must have only one variable. Often advisors make the mistake of comparing 15 and 30-year mortgages without adjusting the time frames to equal each other—a common mistake to make.
When comparing mortgages, you already have a variable, so all other components must be the same to get an accurate comparison. In simple terms, that means these mortgages must be compared at the same rates—the simplest being a 15-year mortgage over 30 years compared to a 30-year mortgage over 30 years. When advisors compare rates at unequal time frames, the data will be skewed.
3. Ignoring Opportunity Cost
Opportunity cost is closely linked to the time value of money, which can be boiled down to this: opportunity cost is the loss of a potential opportunity by taking another one. In typical financial planning, the opportunity cost is not often factored into discussions, or at least not in a way that reveals the whole truth. As with every choice, the possibility of another choice is ruled out.
When it comes to investing your money, opportunity cost can be everything—what is the opportunity cost of fees and taxes on the growth of many stock market oriented investments? What is the cost of taking out a loan with the bank rather than borrowing against your whole life’s cash value at the insurance company (or vice versa)? TC software makes it simple to map out multiple options for your client, and Truth Training shows you how through a three-day intensive course.
4. Not Understanding How Interest Rates Work
Interest rates are one of the most commonly misunderstood financial concepts, which is how banks are able to make large profits off of seemingly low rates. As a financial advisor it is crucial to understand the true nature of interest rates, so you can best demonstrate the principals to your clients. When assessing the difference between two rates, borrowing at 3% and investing at 9% may not seem too different—only a difference of 6%, right? Unfortunately, that’s the catch; banks and other companies depend on this misconception when the margin of increase is truly a 200% markup.
When working with interest rates, converting the rates to dollars can help in understanding their true nature. For example, if your client were to take out a loan of $100,000 at a 4% interest rate and invest that same amount at 5%, you can quickly see that the difference is not 1% but 25%. Learning to understand the truth behind interest rates can keep more money in your client’s pocket instead of the bank’s. Using the TC calculators make it simple to calculate these differences without needing a specific formula.
5. Thinking Life Insurance Only Works If It Has PUA’s
PUA’s can certainly benefit a whole life policy, but they do not make or break one. Whole life does not offer large immediate returns but requires patience to build up cash value. After 5 years a policy truly begins to pick up, which is why it’s important to encourage clients to start early to reap the most benefit from their policy. Even a minimum payment of $100/month for a young person can offer great returns only a few years down the road—and when things are looking up, it doesn’t hurt to add a PUA or increase the premium.
The best way to guarantee the failure of a policy is not to have one at all. Savings are a crucial foundation of prosperity, and a whole life insurance policy is an invaluable savings tool.
6. Believing Life Insurance Only Works If You Borrow Against It
The prospect of borrowing against the CV of a life insurance policy seems to be the biggest benefit, but it is not the only way to make a policy “work.” Life is unpredictable, and having a whole life policy in place can benefit your client in case of an emergency.
In fact, the first job of the cash value of the whole life policy should be an emergency fund, left there at the insurance company. This money creates peace of mind and financial confidence for the family so they can pursue the next phase of the policy: their opportunity fund. Many advisors know that families benefit from having large amounts of available cash value, even though they may never use it, just for the potential of being able to take advantage of an opportunity when it comes along. Additionally, the death benefit creates an immediate legacy or estate, just from the stroke of a pen. Whole life insurance provides options and thinking of it as an “and” account that has a death benefit and possibly LTC and Waiver of Premium riders helps out even more.
7. Talking More Than Listening
As advisors, it is easy to fall into the mindset that you have all of the information your client could want, so you must do all the talking. Though not entirely wrong, it is important to remember that the client is an individual, and he or she will have unique problems. Your client wants to be heard, and when you slow down and listen you might find there is a unique way to handle the situation. Typical financial planning tends to have a cut and dry formula for clients, setting up qualified plans left and right, and selling the products advisors are told to sell.
What sets a prosperity economics advisor apart is their willingness to look at the individual’s desires and provide real strategies to achieve prosperity. While it may be a smart move for one client to borrow against their CV and be their own banker, it might be more prudent for a newer client to take out a bank loan and only dip into their CV to bail them out should things go south. Families with few children will have different desires than families with many. As an advisor, set yourself apart by taking the time to listen to your client, and help them find the best strategy, instead of pitching them the typical plan.