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.”