If you want to be a millionaire, buy something for 9 million and sell it for 10 million. Done!
No need to create anything and you become a millionaire overnight.
Wouldn't it be great if it was that easy to become a millionaire?
Sadly for 99% of people, it's not that easy. There is actually a lot of skill and hard work needed to make a deal like that happen.
Whilst it might not be easy to become a millionaire overnight this way, there is certainly a lot of money that can be made by becoming a 'broker', i.e., connecting buyers and sellers. Hence, I thought I'd talk to my daughters about it and write this Brokering 101 blog.
As I was writing this blog, it became clear that there are two benefits of teaching my kids about 'brokering':
Knowing how brokering works can save them a lot of money when they are older (as it did me)
I want them to understand that there are many different ways of making money (we have previously talked about careers, starting a business and investing).
In this blog, I share:
How a broker saved us thousands of pounds
The difference between Brokering and Trading
How do brokers make money?
Why do people need brokers?
Good vs Bad Brokers
How a broker saved us thousands of pounds
A few years ago I was looking to re-mortgage our house. I did what most people do and looked for the best mortgage deals on comparison websites. However, before going ahead with what I thought was the best deal, I decided to call a local mortgage broker to see if they could beat the deal I had found.
I'm not sure why I called them as, like most people, I assumed their deals would be more expensive as the mortgage company would have to pay them a fee. I'm glad I did!
To my surprise, the mortgage broker came back with a deal which was quite a bit cheaper (i.e., lower interest rate) than what I found myself. Turns out they have access to deals which are only available to brokers. This saved us thousands of pounds on our mortgage and I didn't have to pay the broker anything (they got paid by the mortgage company).
As this was a money experience that saved me money, I thought it was worth sharing with my daughters so they know how brokering works as it could save them money in the future. Also, as mentioned at the start of this blog, brokering might be another way for them to make money.
The difference between Brokering and Trading
When talking to my daughters about brokering, I shared the story above and explained the difference between brokering and trading - as they both relate to buying and selling.
A trader is someone who buys something with the hope of being able to sell it for a higher price. For example, a trader might buy lots of tins of beans at a wholesale price and then look to sell these for a higher price later. If they don't manage to find a buyer then they could lose money.
Side note: When it comes to the stock market (buying and selling shares), there is a difference between trading and investing. I'm currently writing a blog on this so make sure you subscribe below so you don't miss it.
A broker is someone who links buyers and sellers. Using the tins of beans example, they would find someone who wants to buy tins of beans and then link them up with a seller who is offering the best tins of beans at a good price. They don't buy or sell the tins of beans themselves - they advise and connect the buyers and sellers of tins of beans.
Rather than tins of beans, brokers usually help in areas which require a lot of expertise. Examples where brokers may help include:
The stock market, i.e., a stock broker
Real-estate
Mortgage
Insurance
Art
Luxury or vintage cars
That being said, a broker could make money in almost any niche area. I explained to my daughters that as they are becoming experts in Sylvanian Family toys (which my eldest collects), in the future they could potentially broker buyers and sellers for the rare editions.
How do brokers make money?
This was a question that my eldest asked. It's a great question as brokers aren't creating new products or services, they are just helping people buy and sell products and services that already exist. They are the 'middlemen' in financial transactions.
I explained that there are two ways in which brokers can make money, either:
Commission: In most cases, the broker will take a small percentage of the amount of product or service sold. For example, if you use a mortgage broker, the broker might get around 1% of the amount you borrow as a commission.
Price difference: This is best explained using an example. If someone says they are willing to pay $1,000 for a Rolex watch but they don't know where to find one, they might use a broker. The broker would then look for the watch and if they find it for $800, they would keep the difference, i.e., $200.
The more expensive the product or service they are helping to broker, the more money they make. That being said, as a broker makes money every time there is a transaction, they want there to be as many transactions as possible. This sometimes leads to bad behaviour from some brokers. I'll explain more about this later but let me first explain why buyers and sellers need brokers (as this helps explain why I got a good deal on my mortgage).
Why do people need brokers?
Why would a seller use a broker?
I explained to my daughter that, essentially, brokers are a form of marketing for the seller.
For a company to sell their goods or services, they need buyers. The company could put out adverts and then hope potential buyers will see these adverts and buy their goods or services. However, advertising is very expensive and only a small proportion of people will end up buying, especially if they are selling a complex product or service. This means there is a lot of money being spent by the company without any potential buyers.
The alternative is for the company to use a broker to find buyers. The broker would learn about the product and service that the company is selling and then search for potential buyers. As the company only pays the broker if they find a buyer, it means they can save a lot of money compared to advertising (and some of these savings are used to pay the broker).
Why would a buyer use a broker?
There are a few reasons why the buyer would use a broker:
Getting the right service/product: A broker is generally an expert in their field and can help ensure the buyer gets the right product/service at a fair price
Only available via a broker: Some products are so complex that certain processes have to be carried out to protect the buyer (regulations) and this requires a broker (for example, buying and selling shares of a company via a stock broker).
Discounted prices: Brokers have good relationships with sellers and get special discounts which they pass on to buyers.
You might assume it would be cheaper to buy something without the broker, as the company selling the product/service wouldn't have to pay the broker's fee, but that's not the case. If you didn't use a broker, the selling company assumes that you came to them due to their advertising, so the price is higher to cover the costs they have outlaid for this advertising.
Good vs Bad Brokers
Good Brokers:
Help buyers find a fair price for what they are looking for
Provide insights and options
Find a good deal for everyone (very transparent)
Bad Brokers:
Brokers don't always have the best reputation. You only have to watch the film 'The Wolf of Wall Street' to know that there are some dishonest brokers out there. They try and sell complex products to people who don't need them so they can make a commission on the transaction.
Essentially, bad brokers only care about making money for themselves. They do this by:
Getting people to buy something they don't need
Getting people to buy and sell frequently (more transactions means more money for them)
Hiding costs/fees
The advice I've given my kids is to be cautious if a broker ever approaches them and tries to sell them something they weren't looking to buy. I would want my kids to do some of their own research before agreeing to any deal offered by a broker.
Summary - Making and Saving Your Kid's Money
Teaching your kids about brokering can potentially save them a lot of money when they are older, for example, when looking to get a mortgage. If they understand how brokering works, they are more likely to use one (rather than just assume it will cost them more as there is a 'middleman').
Also, if your kids develop a particular expertise in a certain niche it could potentially allow them to make money by becoming a broker in that particular area (either full-time or as a side project).
In my opinion, it's always good for kids to know there are different ways to make money, even if they decide that it's not a route they want to pursue.
If your kids want to make money from brokering, they need to learn how to sell.
Continue reading ... How to teach your kids about selling
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P.S., Do you want your kids to be great with money? If so, buy them a copy of Grandpa's Fortune Fables from Amazon. They will soon be managing money better than most adults today!
