Basis Point (0.01% = 1 bp)

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DEFINITION:

A basis point is a tiny unit of measurement equal to 0.01% (1/100th of a percent). It’s used to discuss small changes in interest rates, fees, or investment returns. For example, if a mortgage rate rises from 3.25% to 3.50%, that’s a 25-basis-point increase.

WHEN AND WHY IT’S USED:

Basis points are used to avoid confusion when discussing percentages. Saying “fees rose by 50 basis points” is clearer than “0.5%” because it reduces decimal errors. This precision is critical in contracts, fund prospectuses, or central bank policies.

IMPORTANCE IN ADVISOR CLIENT COMMUNICATION:

Basis points prevent misunderstandings. Clients might glaze over when hearing “0.25%,” but “25 basis points” signals precision and importance. Advisors use this term to emphasize that even tiny differences matter over time.

This term also underscores fee awareness. Explaining that a 1% fee is 100 basis points helps clients grasp how fees compound. For example, “A 10-bp reduction in your expense ratio saves you 1,000 annually on a 1,000 annually on a 1 million portfolio.”

Finally, basis points standardize communication. Whether discussing mortgage refinancing, bond spreads, or advisor fees, using this unit ensures everyone interprets changes the same way.

CONVERSATION EXAMPLES:

Advisor: “The new fund’s expense ratio is 15 basis points lower than your current one, saving you $1,500/year.”

Client: “How much did rates go up?”

Advisor: “The Fed increased them by 75 basis points—that’s 0.75%. Your adjustable-rate mortgage payment will rise by roughly $100/month.”

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