349: Basics About the Financial Industry

Learn what is important to understand about how the financial industry works.

Recently I was talking to a friend about the book I'm writing. She mentioned a few things to me that she didn't understand. This woman is well-educated, middle aged and very successful. She lives in an expensive urban city. She's savvy, but I was surprised by what she had to say.

1. She couldn't be good with finances because she's not good at math.

Financial matters have little to do with math.

2. Why are banks intimidating? She said she feels intimidated to go into a bank lobby and like she has to beg to get her own money.

That is by design. You own your money of course, but banking is a fractional reserve business. That means they have only a small amount of cash on hand, the rest is created by computer digits, like when they make a mortgage loan. The worst thing that could happen is if everyone demanded their money at once. They do everything to discourage it. They even make you wait and have to send for cash from other branches if you want a few thousand in cash. They can also make you feel like you're suspicious.

3. Why people call her from the bank and try to get her to move her money.

Banks are in business to make a profit. Some employees are on commission. If they are providing a "service" call to you, it sounds like they will earn a commission if they move your money into a higher fee financial product.

4. Along the same lines, I want to share my health insurance story. I received a letter in the mail that my health insurance was being cut off. They gave a phone number to an agency and a website that didn't have health plans on it. It basically forced me to call an agent. The agent showed me one company and told me the premium would be 70% higher than what I had been paying. She wanted to sign me up. I asked if there was a website and she reluctantly gave it, then abruptly wanted to get off the phone with me. On the website there were 5 companies with multiple plans and the premium stays about the same as what I had been paying.

Let's look at what happened and what you need to know about how the industry works. The premiums were so much higher partly because the person on the phone was probably going to be paid a commission every time I pay my premium. She would get a cut of what I'm paying. I suspected this and that is why I wanted to go to the website directly. It's similar to booking a hotel directly at the hotel or finding a cheaper rate online.

Bottom line: when you are dealing with people, they often work on a commission sales basis. The cheaper route - and by the way the identical coverage - is provided online when you buy it yourself.

You may already know all this, but I was surprised my friend didn't. I don't hear a lot of people talk about these basics, so I'm glad we covered them today.

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