As an investor-negotiator, you must examine carefully how any proposed commitments will actually work. It is your job to determine what will be advantageous and what might lead to disaster. If the terms of a deal under discussion are to your disadvantage, you should bargain hard to change them. Where change is not possible, or the other side declines to be flexible, you should walk away. Refuse to be bound in ways that work against you or make a good outcome unlikely.
Pay Attention to the “When” of Commitments
In addition to how much each party is bound, a careful investor pays close attention to when the various obligations, contracts, and binding events take place. The key thing is not to get tied up until you are completely ready. Since one of a salesperson’s primary goals is to close the deal, trickery might be used to create a binding situation.
This sad story is typical. A senior citizen approached me after one of my classes to ask for guidance. The previous year, a “financial advisor” had been trying to persuade him to invest in a variable annuity product. It went by another name and, like almost all of them, was incredibly complex. The man indicated that he would probably go ahead and do as he was being told. First, though, he wanted to bring the complicated document to his long-time personal lawyer. The advisor put tremendous pressure on him to sign the documents first and then take copies to the attorney for review. As you can guess, by the time the lawyer raised concerns about the product, it was effectively too late. The gentleman was stuck with a terrible investment.
Many complex investment schemes become compulsory upon signing or when payment is made. Others require some formality, such as a notarized signature or guarantee. Great care should be taken before signing, giving over money, or otherwise entering into a deal. You should absolutely refuse to be rushed. Prudence dictates you should “sleep on it” in any case. Beyond that, though, it is good practice to require review by an expert you trust to exercise strong judgment in just such matters. A great deal of money can be lost in the time it takes to sign a document.
Chapter Summary
Try not to be tied in and avoid exit fees, penalties, back-end loads, or anything else that makes it harder for you to walk away whenever you wish.
Investments that can be “called away” from you aren’t so good, either.
It is up to you to examine carefully because some deals can bind you in tricky ways.
Pay attention to when the agreement binds you, and for how long.
Don’t agree until you are good and ready.
Consider having the investment deal reviewed by an expert you trust.
Chapter 25
The Four Phases of an Investment Negotiation
As you recall, there are four phases to any negotiation. The process of investing is no different. As an investor-negotiator, you should seek to stay focused on these four stages and what each one requires of you.
There is a great deal going on simultaneously when you are negotiating over your investments and, ideally, you will try to anticipate and stay on top of it all. Pay attention to the who, what, when, where, why, and how of the entire process. You want to do the necessary research and planning before engaging with the other parties and then continue to observe and adjust throughout the entire negotiation. There can be a lot to do. As you will soon see, a gigantic amount of your money is at stake. It is worth making the effort.
The Preparation Phase of Investing
Being well-prepared pays off in better negotiation outcomes. Many experts consider this the single best piece of advice they can give. This first phase of the negotiation is tremendously important.
The preceding chapters of this book create something of a checklist for your preparation:
Determining your good outcome—where you want to end up
Identifying everyone’s interests
Finding strong alternatives—strengthening your BATNA, and maybe weakening theirs
Reviewing which options create the best deal for you
Articulating your standards of fairness
Setting the tone and managing the power dynamics of relationships
Deciding what communication modes best suit your purposes
Thinking through what commitments you are willing to make, and when, what commitments you must have from them, and how you can ensure their promises are carried out
Not only should you work through this checklist from your point of view, but you should also anticipate the other side’s approach to each of these areas.
Break down your planning into substance, relationship, and process issues. For substance, go back and review your interests and theirs. For relationship issues, consider how you want to work with and feel about those who will have access to your money. Remember that you should never ignore matters of substance for the purpose of relationship building. Rather, use relationship tools to strengthen the relationship and substantive tools for finding fair solutions for the specific terms of a deal. Relationships can be strengthened with honesty, small gifts, acts of kindness, and friendly gestures. The specific terms of a deal should be hammered out using outside measures of fairness, balanced trades of important interests, and appropriate compromises.
An old law school classmate of mine had a problem. His childhood pal had become a stockbroker and, over the years, invested more and more of the lawyer’s money as a representative of one of the nation’s giant financial firms. After long calling himself a “financial advisor,” he was now a self-styled “wealth advisor.” This year, he left his longtime financial company to join a different one that was also a household name. Now he was pressuring the lawyer to transfer his account to the new firm. My classmate wondered if this was good idea.
He worried about the new company’s reputation (it had recently paid a huge fine to the SEC) and was awakened to the possibility that his investments were not well-managed. His great concern, though, was that the friendship hung in the balance. “If I don’t switch my account to the new firm, I fear he will stop being my friend,” he confided. After he reviewed much of the material that is in Part III of this book, my classmate became more apprehensive. He wondered aloud why his old friend had switched firms. “Probably for a large check,” I told him. We spent some time on the Internet and were able to hazard a guess that his friend had probably received in excess of $1 million to switch firms. The lawyer’s concern gradually changed to disgust. “He should have told me. I was ready to do it for him out of friendship, while his motivation was money.” The stockbroker’s failure to use the relationship tools of honesty and straightforward dealing were as critical as his failure to offer a financial incentive as fairness would seem to dictate.
As far as the negotiating process, there is a good deal of advance planning that can help you succeed as the negotiation unfolds. Much of the thinking and research you want to do needs to happen before you start talking to the other side. Where should the negotiation take place? How will the seating affect the assumptions, flow, and power dynamics? Are there physical changes to the room that can alter the process to your advantage? What role might food or beverages play in a constructive discussion? What nonverbal messages do you want to send?
Consider the sequence you’d like the discussion to follow. What information will you reveal up front? Later on? Never? What trades might you make? What partial deals might help set up the approach to reaching final goals? What promises will they need to make, and how can you ensure that those will be honored in full?
Gather New Data Continuously
As you work through the details and sequencing of the anticipated negotiation, it will become clear that you need more information to succeed. Negotiators must constantly gather data as they proceed. Here are five things your preparation should cover:
Notice what information you are missing. What do you need to learn from them? Write down your questions and work them into the conversation in ways that will encourage the other side to answer honestly.
What math are you going to nee
d to understand? Have you taken compound interest into account?
What industry terms and jargon are likely to be used in discussions? Do you know what they mean?
Are there typical selling points, industry practices, illustrations, or deceptive claims for which you need to be prepared?
What can you find out about the individuals with whom you will be negotiating? How about their firm? Matters of their style, reputation, experience, needs and wants would be helpful to know.
Speak with others who have gone down this path before. What are useful questions to ask? Prepare, prepare, prepare, and you will be ready for the negotiation to come.
Keep in mind that the preparation phase is both a concrete time and a state of mind. You should do a great deal of preparation before the rest of the process begins. In addition, though, you can always go back and do more of what might be called “preparation work” once the negotiation process has begun. As you talk, listen, and bargain, you will see that there are gaps in your initial preparation. Go back at that point and fill them in. There is no point in the process at which learning more is without profit.
There is an ancient story of a wise man and a king preparing to play chess. If the king won, he wanted the wise man to tell him all the secrets of science and mathematics. When asked what he desired if he should prevail, the wise man requested the following. The king should put one grain of rice on the first square of the chess board. On the second square, he would double that (two grains of rice). On the third square, he would double that (four grains). On the fourth square, double that (eight grains), and so on, until the proper amount of rice for the entire board was gathered up. All this rice should be the wise man’s prize for winning the game. The king readily agreed and even worried aloud that it might not be a sufficient prize for besting the sovereign. They played chess, and it came to pass that the wise man won.
The lesson of this story, as perhaps you can guess, is that the king failed to prepare. After listening to the wise man’s request, he should have insisted on some time to do a little research.
You should do the same. Never hesitate to continue your data gathering at any point. Do not allow yourself to be pressured, manipulated, or coerced into deciding something on the fly that really calls for further study. Failing to take the time necessary for planning, analyzing, and researching can be dangerous. In this case, the wise man knew the arithmetic of compounding. The king did not, which is why the kingdom had to import rice for many years to accumulate the 461 billion metric tons necessary to pay off the bet.
The Exchanging Information Phase of Investing
Your goal in this second stage of the negotiation process is to learn as much as you can. Not only should you fill in any gaps and confirm information that you have gathered, but you can also learn a great deal more. The people you are talking with have access to almost everything you want to know. Your job is to create a conversation that encourages honesty, creates openness, and doesn’t reveal your weak points. You want to get them talking. Of course, they will seek to gather information from you as well. You should try to be genuine but careful—don’t reveal things that you shouldn’t, but allow for open conversation that encourages sharing.
The best negotiators do a lot more listening than talking. The same is true for the best investors. Once you sit down with the other side (even if communicating electronically over thousands of miles), the door opens on an opportunity for gathering valuable knowledge.
Among the most important subjects you seek to learn about are all the particulars concerning the people with whom you are negotiating. As mentioned earlier, the good news is that you are now conversing with the world’s biggest experts on that subject. The very best way to learn all about them is from them. You want to find out about the individual you are talking with, the firm as a whole, and their business.
You seek straightforward information about what they are offering, what systems they use, their business model, and all the ways they make money. You would also like to learn how they address the issues of conflicts of interest, asymmetric information, trustworthiness, and professionalism. Ideally, you will also glean information about their honesty, character, and business practices. Can you get some insights into what they think their BATNA is?
Here are some questions you might explore: How do they see themselves and their business? What do they like and dislike about it? What is important to them as individuals and as a company? What kind of relationship do they want? What are their goals, interests, and underlying objectives? What do they see as fair and why? What are their usual methods of working together?
Plan to Put Them at Ease
Plan how you will ask these questions. Consider writing them out in advance and working to improve how you ask them. Set an open and friendly tone; you don’t want them to feel that you are interrogating them. By conversing in an open and friendly manner, you can help them relax and reveal far more of their true selves. You want your partner to be at ease and not on guard. Not only will truth flow more easily, but also you will be laying some groundwork for building a solid relationship.
An open and warm approach worked well for my old friend Mary.
Mary came to see me with several investment questions. When I asked if she had ever thought of working with a “financial advisor” she told me this story. Everyone in her social circle used Karen Smith, an admired senior investment advisor with the biggest financial firm in the country. Why didn’t Mary and her husband follow their friends’ lead in light of how highly regarded Karen was?
When Karen came to their home for an initial appointment, she was well dressed, drove a nice car, and looked very polished. She had studied the documents that Mary sent her in advance and spoke knowledgably about their investment assets. She inquired about any potential inheritances. She answered questions about investing for education and recommended a 529 college savings plan.
Karen talked authoritatively about the mechanics of how she worked with clients, her fee of 1 percent of assets, and how her clients had lost only about 20 percent in the recent market catastrophe that sent averages down by over 40 percent. In light of the strong recommendation of their friends, Mary and her husband decided in their heads that they would hire this sharp and professional-sounding woman. They also found her friendly and the conversation turned personal and informal. Karen seemed to sense that she had “made the sale.”
Small talk followed. Karen spoke of how good her business was and proudly explained that most of her clients came from referrals. Then the subject turned to family. Mary held forth for a while about her children’s accomplishments. The two women began to speak about their men. With her guard down, Karen laughed and said that her husband regularly teases her about the fact that she knows almost nothing about finance or investing and yet is paid handsomely to advise others.
By creating an open and friendly tone for conversation, Mary was able to learn the essential fact. Karen, unguarded and no longer “negotiating” or selling, had offered up the true answer about her qualifications. As her husband put it, she knew almost nothing about the subject for which she was offering expertise. Without really trying, Mary had implemented the second stage of the negotiation to great effect. She got the information needed most to make a wise decision.
Here are some of the things you will want to find out from a financial advisor who seeks your business:
How does he understand his duty to his clients? Is he willing to put it in writing in a clear letter to you? You are looking to see if he really understands fiduciary duty and acts like a fiduciary at all times.
Who does he see as his competitors? With whom does he compare himself?
Does he see himself as costing clients more, less, or the same as others who provide similar services?
What are his costs and fees? You are looking for a thorough and complete answer. (Thereafter, if you ever catch him making money in a way he didn’t tell you about, you should quit on the spot.)
What exactly will he be doing for you? You want to ask about each type of action, each investment, each service, and his estimate of its true financial value to you.
Ask him to explain the company’s business model. How does it encourage him to use his expertise on his client’s behalf? (And make sure he provides compelling evidence to go with his answer.)
How does he make money from your money? (Your hoped-for answer is “not at all.”)
What conflicts-of-interest does he have with fully advancing what is best for his clients, and how does the firm deal with those conflicts?
Obviously, one possibility is the person may lie to you. Or, he may stretch the truth and omit information to make his proposals seem more attractive. Although you must always verify critical information and cannot assume the veracity of what someone is saying, the answers will be of great use to you. In any event, the advisor is revealing a whole lot about his style, attitudes, methods, and ways of doing business.
One of the things you want to know most is how honest this person or firm is. As I see it, there are many situations in which an outright lie will be all the information you need. My own preference is to minimize working with liars and, if my BATNA is strong, I might well walk away at that point. In life, though, you cannot always afford the luxury of never working with people who lie. Under any circumstances, however, you are going to want to know all you can about just how honest and forthcoming they tend to be.
Negotiating Your Investments Page 20