You have a pretty good idea about some of their interests and you already know how important it is to continue learning more. Together, we surmised that financial services firms tend to want new customers while simultaneously keeping you and other current clients. They also want to make as much money as possible from each customer, maximize their control over capital, and, perhaps, weed out the least profitable accounts. Meanwhile, individual brokers, advisors, and salespeople share most of those interests but many have some individual wants and needs that differ from their employers’. Among these are strengthening their network, meeting quotas and sales numbers, and making more money for their families. Some of them care an awful lot about winning. And, like almost everyone, they seek to keep their bosses happy and impress those who can help them climb the ladder of success in their field.
Work Together to Create Packages of Interests
The task becomes working together to create packages that meet everyone’s interests well. For example, you might propose a deal that helps them keep you as a client and get referrals for new clients in exchange for your desire for low fees, full disclosure, and all the attention you need regardless of how long it takes. Tying the fulfillment of their interests to making sure your own get met is the key to success. As with most businesspeople selling something, they will be glad to make you promises; the critical next step is to link together the completion of your requirements with beginning to meet theirs.
When it becomes clear that more than one satisfactory agreement could be reached, the next step is working together toward choosing the best agreement. The word “best” here refers to the agreement that meets everyone’s interests to the fullest possible degree. The way you work from any acceptable agreement toward the best one available is through a series of proposed trades aimed at bettering what is on the table. Suppose you learned that the advisor you are negotiating with highly values your ability to recommend him to your social circle. In that case, you could suggest improving the deal by cutting the annual fee in half once you have introduced him to a certain number of your friends.
Find the Best Investment Deal among Many
As you can imagine, the number of potential agreements is almost endless. To make this point concretely, take the previous example of deal improvement. Why stop at an agreement that cuts the fee in half? It could be reduced to a quarter of the original proposal if you make a sufficient number of quality introductions. How about no fee at all; is that possible? Might he start paying you? (Careful here, as there are lots of legal constraints.) The point is that any one potential trade of interests could be arranged many different ways. When you multiply that by the numerous interests that each party holds, you find there are hundreds of possible ways to structure the deal. To some extent, you are searching for the ones that meet your interests best while doing the same with regard to their interests. The ability to trade, though, and have one side meeting the other’s interests in exchange for reciprocation is the road to great progress.
Debbie Clay did exactly that.
Working as a teacher was so important to Debbie Clay that, for many years, she could not find the time to learn more about her investments. She had turned the whole matter over to her advisor, Katrina Pulos, a decade ago. Katrina, in turn, was a representative for one of the largest financial companies in the world. In recent months, though, Debbie had started to learn more about dealing with a financial company. A friend suggested paying closer attention and, as a result, she began to study the matter in earnest. She read this book, as well as others by Bogle, Malkiel, and Tobias. When Katrina called to suggest investing in a variable annuity-based retirement product, Debbie knew it was time to have “the talk.”
The meeting started out with Katrina falling back on various sales and reinforcement techniques her company had trained her in. When Debbie made it clear that this was going to be about finding fairer terms, Katrina got defensive. Debbie was able to turn things around, though, by steering the conversation to what Katrina wanted most from their working relationship. While making sure to emphasize that serving Debbie was Katrina’s greatest concern, Katrina was able to say that she wanted to keep Debbie as a client, maximize the money she made, and get help in bringing in new clients. Debbie, in turn, stressed her desire to pay fair (and, in this case, much lower) fees, never be guided toward commission-paying investment choices, and better understand the rationale behind each investment recommendation.
From there, the two women explored a new deal that would be based on meeting more of the interests of each. There were a great many questions to be answered. Did Katrina’s company grant her authority to lower fees? How much leeway did she have concerning which investments to recommend? Was she willing to be more forthright and truthful with her old client than the company guidelines suggested? As for Debbie, what did she consider a fair fee to be? Would she promise to remain a client for a certain length of time? Would she be willing to recommend Katrina and/or to personally introduce her to friends? How much money did her friends tend to have?
They used the if–then structure to investigate the possibilities. If Katrina could reduce the annual fee by 20 percent and promise no commissions, Debbie would recommend her to three best friends. Although Debbie had concerns about her own reputation, she might be able to accompany two of the friends to a first meeting if Katrina would level with her about how much the firm actually makes off each client. And, if all of Debbie’s requests could be met in full, she felt sure that a promise to remain Katrina’s client for at least five years would not be excessive.
After sharing information as fully as possible, they found that some of their interests were in direct conflict, some were aligned, and some were neither aligned nor in conflict. Thus, there were areas in which Katrina could not make more money unless Debbie paid higher fees. There were things that left both of them better off, such as Debbie recommending Katrina to her financially disorganized mother. And there were areas where one’s indifference, and the other’s deep need, made a trade obvious. Two examples of the latter were Katrina’s willingness to spend an extra hour each month explaining recommendations to Debbie, and Debbie’s promise to continue working with Katrina for at least another year (since she felt unable to do the necessary research on other choices in less than 12 months). These two nonconflicting interests could be traded and each woman was better off.
The deal the two finally worked out was their very best effort to meet each one’s most important interests as fully as possible. Debbie got lower annual fees, no more commission-based products, more explanation, and some semblance of the truth. Katrina got to keep her client for at least another year, and the opportunity to win her for the longer term. She also got a definite referral of Debbie’s mom and the possibility of at least two more recommendations. And, of course, they each now have the opportunity to prepare fully for the meeting they will have 12 months from now. Such preparation will include taking actions over the coming year that make it far more likely that the other woman will say yes to future proposals.
The story of Debbie and Katrina, with its happy ending, probably means that I owe you a few more cautions.
A Few Cautions
Financial people want your money. They tend to be rather sharply focused in that direction; it is the nature of the beast. You need to be aware of that, cautious of its implications, and at least slightly skeptical. What this chapter helps you remember, though, is that you are not to hand your money over to them until you have structured a deal that meets most of your underlying interests regarding investing. They very much want a client who is “signed, sealed, and delivered.” You will not sign until the agreement meets your needs.
Two more cautions: Pay attention to where you get information, and to the timing of that information. Most of the financial people you deal with are highly skilled at “closing the deal.” Many have had extensive training in sales, persuasion, and influence. You should expect them to be quite selective about what fact
s and “proprietary information” (company secrets) they will share. Some may even “shade the truth” from time to time. It is very important that you use outside sources to verify what you are being told. Furthermore, they probably know the value of getting their interests met before acting to fulfill yours.
Be careful to structure agreements so that you get what you need before, or at least simultaneously with, fulfilling their interests. In short, craft the deal so that the rewards they seek come only after you have received all that was agreed upon. This method of keeping them honest is very important. Just as you would not pay now for a vague promise to deliver a share of stock next year, you also must not hand over your wealth without forcing them to meet your legitimate financial needs.
With those concerns in mind, try to work with them to put together the best possible deal for all. They want something from you and you want a number of things from them. The stage is set to make the trades and put together the deal that will leave everyone much better off than they started.
Chapter Summary
Use if–then statements to explore trading packages of interests.
Find the best deals among many potential ones.
They want to close the deal, but you should not sign until your most significant interests are met.
They might not always be totally truthful.
Make sure that the deal implements your important needs before theirs.
Chapter 21
Insist on Using Objective Standards of Fairness
Along with seeking to fulfill various interests, you should insist on fairness. Nobody wants to be treated unfairly, and those with negotiating power should always be adamant about it. “Fair terms or no deal” is a very appropriate motto for the investor-negotiator.
Gather Your Measures of Fairness
Good negotiators look to objective criteria, such as authoritative standards and norms, to guide them. These outside measures of fairness can help you in two ways: guiding you as to the general range of what is fair, and making your proposals more persuasive to the other side.
I once had a client who wanted to pay me an hourly fee. Unused to working that way, I had little idea what a truly fair hourly rate would be. The situation called for a little time to collect relevant data, inquire of others, and generally pull together some object criteria on which to base a proposal. She was in a hurry, though, and asked if I could set a fee right then and there. To accommodate her, I decided to come up with something quickly. I realized she had been referred to me by a man I greatly admired. Leigh Bauer was a lawyer and teacher known for his kindness, intelligence, and playfulness. He was also widely regarded as a thoughtful, caring, honorable, and, above all, fair professional. I had my response: “I will charge you whatever hourly fee Leigh charges,” a seemingly gutsy move on my part, since I had no idea how much Leigh charged. Actually, I felt totally comfortable relying on the basic fairness of it.
Fair is not the only consideration in getting really good outcomes, but it is a tremendously important part. If you can get to fair, you and the people you are working with can all leave the negotiation table feeling good about the deal and each other. It cements the present and brightens prospects for future dealings.
Beware of What They Call Fair
It is to be expected that negotiators appeal to different standards, customs, and practices and then try to convince the other side to accept their own formulations and definitions of “fairness.”
A big challenge facing you as an investor-negotiator is that those sitting across the table have a huge head start in creating a one-sided idea of what is fair. The financial services industry has been doing this for a long time and is aided by the best marketers, psychologists, and human behavior specialists in the world. Theirs is a business full of jargon, perceived wisdom, and tautological definitions designed to confuse. It is important that you negotiate using your own language. The jargon of the industry is going to make it very hard to achieve understanding and then work toward fairness.
Just because a practice is “customary” doesn’t make it fair. This industry has long stood virtually unchallenged in setting terms, pricing, and industry standards. One deeply troubling practice is the industry-wide use of a one-sided contractual agreement. One of its provisions makes it almost impossible to work with any broker-dealer without first signing away your right to sue them in a court of law. Such “contracts of adhesion” are usually forced on a weaker party by a stronger one. Any attempt to confront it may be met with an indignant declaration that everyone in the business uses that contract and it is a firmly established industry standard. There will be similar resistance if you challenge pricing, lack of transparency, incomprehensible prospectuses, or conflicts of interest. These are all Wall Street norms and will be presented as inherently fair.
As an investor-negotiator, you must counter the standards and norms put forward by industry representatives and answer with more appropriate ones. To gather these, you should look to standards from other industries, academic research, philosophical ideas on fairness in the commercial arena, or the judgment of consumer advocacy professionals.
As good negotiators do in all fields, propose objective criteria that meet outside ideas about justice and be adamant about a fair deal. It can help to present fairness measures that have achieved a kind of social consensus. A practitioner who gets a fee but is also receiving hidden payments will have little success in claiming that to be a fair practice. Even if it doesn’t rise to a legal definition of fraud, it is generally understood to be outside the bounds of legitimacy. And defending the practice based on its “disclosure” in a long and virtually unreadable document does not change the palpable unfairness.
Keep Your Eyes on Profitability and Transparency
Complete transparency of fees and costs is another objective standard that should be beyond doubt in the court of ethics, good sense, and wise practice. How can you discuss fair pricing, fees, and compensation without knowing what is actually being paid? Imagine going to the grocery store to buy apples and, upon reaching the cash register, finding out that various charges and fees were added to the price displayed in the aisle. To make the image even more troubling, imagine that some of those charges were displayed in code, in an ancient dead language, or in invisible ink. The very idea of hiring an advisor who will not reveal to you her financial incentives and income streams is absurd.
Following closely behind issues of visibility and obscurity, you should think about what a given action or service is really worth. In questioning the level of fees or costs, do not hesitate to inquire about their basis. You should frequently ask, “How did you arrive at that figure? Why is it fair?”
Some years ago, a new client came to us just after having sold a large number of shares of Dell Computer stock. We noticed that the trading fee for that single transaction was over $500. The firm we employ to trade for clients would have charged $12. Why the huge discrepancy? Was there something special or advantageous to the method they used to execute the trade? What is a fair price for that service?
Then there is the issue of how an advisor is paid for her services. Many brokers, representatives, and financial advisors cite industry standards in charging some percentage of a client’s assets. Again, it is worth posing the question about why that particular percentage is the fairest one. Would an hourly or task-based fee be more or less fair than that? What factors influence the cost of the service? Are there historical issues controlling this pricing, and, if so, are they fair to all parties or only to one?
Consider ways to ask how profitable a service is to its provider. You should not begrudge a fair profit to those you work with, but price gouging is unacceptable. To argue that airfares were too high during the past decade requires reconciling the fact that none of the major airlines was profitable. If they were not even charging what it cost to provide the service, there is a strong argument that they were not overcharging. On the other hand, if a provider or industry is consi
stently making more money than comparable work in other sectors, it is possible that they are charging too darned much. And if they are taking too much, strong arguments can be made that lower fees are not only appropriate, but also necessary to meet common definitions of fairness.
Excessive costs, fees, and charges necessarily reduce the actual return on your investments. There eventually comes a point at which unwarranted fees cut so far into the return on your capital that they defeat the very purpose of investing.
Demand a Fair Division of All the Value That the Deal Creates
As an investor-negotiator, you must claim a large chunk of the value created by the deployment of your capital. Lax and Sebenius1 warned that we must not only work to create value, but also claim our fair share of it. John Bogle argues the absurdity of a split in which the manipulator of the capital claims more of the value than its owner.2 Justice requires an equitable split of a deal’s value, but reality reminds us that we had better see to it.
What portion of the deal is it fair for advisors, brokers, dealers, traders, and other intermediaries to take in light of the work they do? This turns out to be a complicated question, but one we dare not ignore. Big money is at stake here, and the math is not always straightforward or intuitive.
Do the Math on Fees and Costs
Remember, this is a search for fairness. Nobody should be expected to work for nothing, and skilled assistance is worth paying for. However, excessive fees, even those that seem “reasonable,” can be extremely costly over time.
Negotiating Your Investments Page 18