Honest Dealings This follows directly upon your need to know the truth about all costs and fees, whether direct or indirect. (I would add that payments made by third parties also need to be disclosed as part of understanding costs.) It may seem so obvious as to be unworthy of mention, but reality dictates that you should list and emphasize complete honesty.
Regretfully, transparency may be the most important thing you are seeking and the hardest one to get. The financial services industry is not a straightforward business.
Comprehensive Explanations of What Is Being Done on Your Behalf You need to understand what is being done for you. Furthermore, you need it explained in plain language that you can easily understand. A bunch of jargon that is meaningless to you cannot suffice.
In addition, good faith efforts should be made to estimate the value of the services you are receiving. Do the things being done for you have value? Are they worth a great deal, a little bit, or nothing at all? Can their value be quantified? Financial service providers are better situated than you are to offer an educated guess on how much their work actually puts into your pocket. Of course, they may be reluctant to offer you this estimate if they are claiming more than a fair portion of the value. An honest provider, however, should be more than willing to have this discussion with you.
Expertise, Knowledge, Skill, and Care If you are to take guidance from anyone, that person must have the necessary expertise. Is she knowledgeable? Does she have all the essential education and training? Do her skills rise to the level of excellent? To put it plainly, does this practitioner really know all that is needed to do the job properly?
Beyond questions of training and expertise, you want someone who will always use good sense, utmost care, and best effort. An advisor who has all the necessary traits but fails to use them consistently on your behalf is not worth having. He must not be overwhelmed or distracted by other things (such as recruiting new clients or making other sales).
To this list, you should add scientific knowledge. It goes without saying that those who hold themselves out as experts in this area must have a very strong understanding of the science of investing. A surgeon who has never gone to medical school, or who studied only psychiatry, would not be an acceptable choice to operate on you. A lawyer who has studied nothing but the tax code in law school would have no business defending you in a criminal matter. So, too, an investment advisor who knows little about economics or finance is not the right person for the job.
You have the strongest possible interest in making sure that all who would guide you possess the knowledge, education, experience, and skill necessary to do the job correctly. One must genuinely “know what he is doing” before you should work with him.
Loyalty In light of the challenges illuminated earlier in this section, you need to work with people and firms who will put your interests ahead of their own. You are looking for providers who not only have the requisite knowledge, but will also use it for your benefit. Will they subordinate their own goals to advance yours?
Other strong interests follow directly from those previously listed, and I urge you to give them full consideration. Look for solid understanding of the problems of conflict-of-interest and asymmetric information, along with evidence of a practitioner’s hard work to address those problems in her business or practice. A business model that is plainly about using expertise on the client’s behalf and clearly rejects making money off your money. You want truth and integrity from those you allow to place their hands on your money. You have a tremendous interest in their truthfulness.
Thinking about Their Interests
Skilled negotiators are also keenly aware of the interests and goals of those sitting across from them at the bargaining table. You deal with many people, directly and indirectly, when you invest. Their aspirations and intentions are often far less straightforward than your simple desire for a fair and generous return on capital.
Start by acknowledging that some investment situations are a zero-sum game. When you buy a share of stock from someone, the more you pay, the more they receive. Pure market transactions are usually this way; you are locked in a contest to get the most favorable terms possible.
When dealing with people and companies, though, the situation can be very different. As we did previously, let’s narrow our focus to negotiations with brokers, advisors, and other financial service providers. Coming to terms with them, and using their guidance, is the kind of easily recognizable negotiation in which you can use the full range of your developing skills. To further clarify the task, let us break the providers into two groups: companies and individuals.
The Interests of Financial Services Firms
The interests of financial services firms include the following concerns.
Getting Customers As is true with any business, financial firms must be concerned with obtaining customers. This can be an advantage when they are pursuing you, in that they want your business. It may be to your disadvantage when their search for other clients competes with their efforts to serve your interests. In any case, though, most financial firms are constantly attempting to win new clients.
While some companies seek any customer who might come through the door with money, many firms are looking for new clients who fit certain profiles. Different providers have different ideas of “the ideal client” but it is safe to say that everyone in financial services is looking for folks with a great deal of money. Well-endowed customers tend to be more profitable, whereas less affluent people may cost just as much to serve yet often pay less.
Making as Much as Possible from the Clients They Have Almost all financial service firms seek to increase profitability. Beyond getting new clients, the way to do this is to make more money from the clients they have. High level strategists may speak of “getting more of the customer’s wallet,” while retail salespeople may be thinking about meeting a quota, but in the end it is about getting more money from folks with whom they are already doing business.
Not all financial firms have the same business model and, as a result, the ways they increase revenues can differ. Some seek greater commission revenue by selling more or better “financial products.” Others may wish to increase the number of transactions to capture more fees or to profit from the “bid-ask” spread. Still others seek to increase distribution of their own “proprietary” products at the expense of other investment vehicles. One way or the other, though, almost all of these companies are seeking to increase their profits. And that goal is a very significant motivator behind the actions they take.
Take note, as well, that some of the ways a company makes money from its customers are very indirect. For example, there are “soft money” arrangements wherein payments are made by third parties, often not in cash, to compensate for influencing or directing client business. A very typical example is a mutual fund company that offers free computers and software to those brokers who will promote their funds.
Controlling Your Capital Many firms make a great deal of money by being in control of your money. The fewer strings attached to your capital, the more they can use to advance their own needs.
Just a few examples can help to illuminate this point. When banks or other companies engage in underwriting, they must sell newly created shares. Having a built-in clientele for such new shares is very valuable for them. Or, consider any situation in which there is a spread between what they must pay to use your money and what they can then bring in by deploying it. For instance, if a bank borrows your money at 1 percent but can lend it to a mortgagor at 3 percent, it stands to profit handsomely. Finally, think about a life insurance company that is definitely going to pay out everything you put in at the time of your death, but gets the free use of the capital for (on average) many decades.
Keeping You as a Client In most cases, it is significantly more profitable to keep a current client than to obtain a new one. Financial services companies have a strong interest in retaining the clients they already have. Thus, it is
strongly in their interest to keep you as a customer. It may be worth their while to keep you satisfied and happy as a way to pursue this goal.
The Interests of Individual Financial Practitioners
Individual brokers, advisors, and salespeople can have very different motivations from those of financial companies. Their career and personal goals can result in some interests that are contrary to those of their employer. Or, to be more precise, some of their interests are aligned and some are in conflict. You want to always be cognizant of this when dealing with individual providers. The interests of individuals who earn their living offering financial services include the following.
Getting New Clients and Retaining Current Ones Like their bosses and companies, investment advisors seek to gain new clients while retaining their old ones. They are trying to increase their income by building up what the industry calls their “book of business.” As a general rule, they want to hang onto you.
Building Referral Networks One of the primary ways that such brokers and advisors get new business is through their current clients. It is well known that the single best way to grow is through referrals. You have a potential role to play in their future success and you should bring that prominently into your negotiations.
Meeting Quotas and Keeping Their Bosses Satisfied Almost everyone has a boss. And everyone who does has a strong interest in keeping the boss happy. Many financial firms set quotas, directions, and sales goals. They also push particular products for their employees to sell based on internal criteria. Even if cloaked in very fancy industry jargon, they must “move the merchandise” to please their superiors. This is obviously a significant interest that tends to motivate behavior.
Winning The financial services industry tends to draw some very competitive people. Many of the men and woman in this field are naturally inclined to see their work as a kind of game. Such folks are determined to win. When dealing with such a competitor, it is helpful to learn what they understand winning to be. Then you can exchange your help with it for the fulfillment of some of the things you need.
Making Money Over the years, I have often said that not many people go into the field of money for altruistic reasons. Most individuals working in these financial fields have chosen to do so because they want to make a lot of money. They are often the type of people who are never satisfied that they have made enough. Making more money is a huge motivation for many of the folks in this industry.
Time You have heard the expression “time is money.” That is particularly true for anyone whose job includes searching for more business. As previously mentioned, brokers and financial advisors spend a significant part of their working days searching for leads, introductions, and new clients. As a result, they have a huge interest in freeing up time to pursue those endeavors. They tend to want things that are quick and easy and are put off by situations that are time consuming or require significant attention.
They are usually looking to get the deal done, have the papers signed, complete the trade, or quickly finish whatever the matter is. For myriad reasons, they would like to be granted as much discretion as possible. And they are unlikely to be pleased with spending too much time on your problems.
Interests That Can Lead You Astray
In discussing good outcomes, I invoked King Pyrrhus to urge against seemingly desirable actions that actually lead us away from the results we seek. There are many such dangers as you pursue positive investment aims. Be on your guard for interests that are ostensibly positive but have great potential for steering you wrong or taking your eyes off the real prize.
The relative weight and importance of various interests is deeply subjective. In the end, only you can decide what is too essential to put aside. Years of experience, though, have led me to believe that some things are better off left out of your investment activities. I offer them to you now.
When investing, I omit my usual interests in building strong relationships with the other negotiators, living up to my code, making the world a better place, and improving how I am seen by others. These wonderful human activities leave an investor vulnerable to manipulation.
The world of investments is not a place to look for solid friendships. Jane’s story may illuminate the point. She got an exciting new job in a new city. It was all-consuming, though, and Jane had little time for friendships or leisure activities. Her substantial salary and stock options compelled her to make time to search for a financial advisor, and she quickly found a female broker who made her very comfortable. They quickly became friends and occasionally got together for social outings. The broker was very involved in several wonderful local charities and Jane began joining her in those activities. Many years passed before, one day, Jane’s nephew Matthew inquired as to what her friends’ services actually cost. She had never bothered trying to figure that out and always assumed that the broker was held to some sort of industry standard. The bold nephew was studying economics and finance in graduate school and was motivated to really explore the question. It turned out that the broker was extracting fees, commissions, and charges of more than 3 percent per year. By the time Matthew finished crunching all the numbers, he concluded that the friendly broker had cost Jane over $6 million.
I have also found that when making investment decisions, leaving my self-esteem at the door keeps me from making poor choices. While issues of ego, self-esteem, pride, and place in the community pecking order come up for me regarding personal finances, I try hard to disregard those impulses. At the very least, I don’t want them influencing investment judgment. Seeking to feel better about oneself through investment practices is a ticket to losing a great deal of money. As mentioned earlier, some people invested with Bernie Madoff in an effort to be part of a very desirable crowd. Similar examples can be found throughout history.
A great deal of investment marketing is aimed at your ego and actually ignores your pocketbook. Here is a list of things that, in my opinion, you don’t really want:
Superior research: It isn’t going to help you make more money.
Ease of trading: The easier it is, the more of it you may do. Few things are worse for your investment returns than frequent trading.
An advisor who “cares deeply” about your individual situation: You are not likely to find one who cares more about you than about money.
Online services: This is primarily about lowering costs for the investment company.
Beware of the images that advertising tries to establish as somehow real. Slogans and heroic music, helicopters and private jets, and the visual trappings of outstanding service—elegant lobbies, crisp suits, warm handshakes, personalized letters, and snazzy online tools—will not enrich you. They don’t take you one step closer to your good outcome. In fact, these marketing ploys are attempting to deflect your focus away from strong returns, low costs, and solid economics. You don’t want bells, whistles, tools, levels, or lists unless they actually improve your financial return. Glitzy images and minor services are worthless, and you should decline to pay even a penny for any of them.
Chapter Summary
Figuring out underlying interests in an investment negotiation will help you create better deals.
Ultimately, it is you who must determine your true interests.
Some typical interests are low costs, clarity on fees, honest dealings, and full explanations.
Indispensable characteristics of worthwhile advisors are expertise, knowledge, skill, care, and loyalty.
Investment companies and their representatives have some interests in common, but also some that conflict.
Investment companies typically want new customers, maximized profits, control of capital, and client retention.
Individual advisors really want to retain old clients and get new ones, build networks, get referrals, keep bosses satisfied, win, have free time, and make money.
Beware of seemingly important interests that only lead you away from your good outcomes.
Consider sharply
narrowing some human interests when making investment decisions.
Be cautious about friendships that are linked to investing arrangements.
Marketing for financial services is often about distracting you from what is really important. Keep your eyes on the prize.
Chapter 20
Many Different Possible Options for How to Structure the Deal
As you recall from Chapter 2, option means something very special to a negotiator. Unlike alternatives, which are all the things you can do outside of the deal you are working on, options are all the different ways you can structure this deal. In most cases, there are a great many different ways to structure any deal.
Trade Their Interests for Yours
How can you, as an investor-negotiator, engineer the best possible agreement from among the many possible options? By trading things that you want and need for items of great importance to the other guys. By making use of “if–then” statements and conditional proposals, you can offer them greater value in exchange for what you really want.
As you realize, the lists of underlying interests that you began putting together in Chapter 19 are the raw materials to be used in crafting good deals. You are looking to trade things that they really, really want for those items most important to you. Thus, the process of finding out what they truly care about is one of the most important things you can do. In the case of brokers, dealers, and other types of financial advisors, separating their true motivations from what they say is critical. After all, you will only be able to meet some of their true interests if you can learn what they are.
Negotiating Your Investments Page 17