Negotiating Your Investments

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Negotiating Your Investments Page 21

by Steven G Blum


  Be careful, though, not to assume deceit where it may not exist. In my experience, great numbers of people working in financial services truly believe things that are simply not so. Daniel Patrick Moynihan famously said, “Everyone is entitled to his own opinion but everyone is not entitled to his own facts.”1 The person trying to win your business by telling you untrue things may not be lying. Then again, do you really want to put your money in the hands of someone who is seriously misinformed about her own field?

  The Bargaining Phase of Investing

  At some point, the discussion will shift away from learning about each other. Talk of prices, terms, and conditions will begin. At that point, you will have moved into the bargaining stage of the process. This is when exploration of trades, offers, and counteroffers occurs.

  You are seeking to make investments on the most favorable terms possible, while the other side is also looking to maximize their advantage. Although some compromise may eventually be called for, the best way to proceed is by seeking trades that increase the overall value on the table. Look to offer them something they value highly that you are willing to trade for those things having great value for you.

  Propose Ways for Them to Meet Their Most Important Interests

  How can you persuade the other side to meet your primary interests? By offering them much of what they want in exchange. There are numerous ways you can put the deal together to move in the direction of your good outcome. What packages can you propose that will meet some of their important interests in exchange for most of what you need? What sequence should you follow? What compromises are you willing to make?

  Remember to word these trades as if–then statements. Always pair offers with your requests. For example, you could suggest a lower annual fee like this: “If you could bring the fee down to match your lowest cost competitor, then I could increase the amount in my account from a quarter of my total assets to half.”

  Another thing you can offer them in trade is the promise of referrals. Of course, you will make this contingent on their fulfilling their end of the bargain for a certain length of time. A good investor-negotiator may trade referrals, introductions, and testimonies of satisfaction, but only for long-term and verifiable performance. In short, let them know what you will do to help them succeed if they do all that they have promised. And, of course, be sure to follow through on your offer and keep your word.

  You are presenting possibilities, not demanding that they concede. Start with proposals that are very good for you, yet demonstrably based on some fair standard that you can show them. From there, make small concessions on the things that are most important to you. Make more generous concessions on those matters that have less value to you. Take care not to move beyond demonstrably fair. And when you move in their direction, don’t just give in but rather offer a legitimate reason for each change.

  Thus, for example, if you seek a promise that the advisor will receive no commissions, explain why that is fair. You might offer them a calculation of how much higher the operating costs of those funds tend to be in comparison with alternatives. Whether articulated or not, they will be concerned about the amount that such a promise would cost them. You could propose to pay them a fixed fee to make up some of their lost revenue. Couch that idea in conditional language such as “If we can agree on no-load funds with internal operating fees under 30 basis points, then I could consider paying you a greater fixed fee to make up for some of the lost revenue.”

  Let Them Know the Things on Which You Cannot Compromise

  There are going to be areas where you have little room for compromise. For example, when you demand a fiduciary pledge, defining that term in writing, some firms are going to want vague language. This might look conditional on their part, but it is probably more of a dodge or a play for time. You can still use the if–then structure, but with less flexibility. If they can put their fiduciary pledges in an acceptable written form, then you can consider entering into a deal.

  A special note about complexity: It is not your friend. At best, it adds costs that result in you paying a higher price for whatever it touches. At worst, it is a window that lets thieves in the door. Bargain for simple and straightforward approaches. Resist structures that are too complex to easily comprehend. Finally, crucially, if you do not understand something completely, do not allow it to remain in the agreement.

  Keep in mind that a good deal creates value for everyone involved. Or, to state it more accurately, it definitely creates value for them—this is their business and they will not agree to unprofitable terms. Whether there will be value for you may depend on how well you assert your claim to a fair and substantial share of the value created by the deal.

  Be Aware of Their Salesmanship Skills

  Achieving this is not necessarily easy. The people you are negotiating with are experienced and trained; they are experts at deflecting requests for deals more favorable to the investor. During this bargaining stage, remind yourself of some of the things you have learned. Most important is the strength of your BATNA; they need you a great deal more than you need them. Also remember that this is not the equivalent of dealing with your doctor or lawyer, situations in which you tend to do as you are told. Rather, it is a negotiation in which a great deal of the authority at the table is yours. Finally, keep in mind that you have no intention of accepting something that is fundamentally unfair. Show them how you measure fair, and make them respond.

  Warren Buffett is often quoted as follows:

  There is always a patsy at the poker table. And you can almost always identify who it is. If you have been playing for a while, and you still don’t know who the patsy is, you’re the patsy.2

  You will not be played for a patsy, nor will you be fooled. All that preparation and learning and gathering information was for the purpose of holding your own in the bargaining phase. Be pleasant, be friendly, be nice, but above all, hold your ground. And if you find that a bargaining session is not going your way, take a break. Decline to sign anything, but promise to return at a certain date. Then go home, take a deep breath, review your alternatives, and reread the relevant parts of this book.

  The Closing and Commitment Phase of Investing

  As you continue bargaining, an acceptable deal will eventually come into view. This is the time to review what you are really trying to accomplish. Think about the interests you wrote down and make sure the proposed deal truly leads toward your good outcome.

  Build In Your Ability to Check on Them and to Get Out

  Make sure the emerging deal includes two essential things: (1) enough transparency that you can continue to monitor that your interests are being met, and (2) your right to easily get out of the arrangement if that proves not to be the case. This is particularly important in the investment context because changing market conditions can alter your situation rather suddenly.

  You also want to increase the likelihood that all the promises made by the other side will be fulfilled. How can you structure the deal to make that as likely as possible? Try to work into the agreement incentives that reward them upon successful completion. At the same time, penalties for failing to follow through will increase their motivation. Remember, they will perform on those promises that they see as being in their best interest to keep.

  Watch out for terms or situations that will limit your ability to walk away whenever you want. Are there penalties, charges, or other structures that lock you in? Will your ability to alter or terminate the deal be hampered by complex requirements or paperwork? Are you promising something unconditionally that you might later wish had caveats or escape clauses?

  A client came to us recently with a partnership interest that required him to meet capital calls whenever they might occur. In other words, the people running the investment vehicle could demand more of his money as they deemed necessary. As you can imagine, he soon came to regret that.

  Your ability to end the deal or walk away with ease serves more than one purpose. N
ot only can it potentially free you from an arrangement you later consider unfavorable, but it also increases your power. If someday a disagreement occurs or something promised is not carried out satisfactorily, your leverage will be greater if you can credibly threaten to take your business—and your capital—elsewhere. Getting locked in necessarily weakens your BATNA. Being able to walk away will strengthen it.

  You can also put the scarcity principle to good use.3 Throughout the bargaining and as closure comes into view, let the other side know that you have an alternative. Without sharing its details, help them understand that its terms are almost as good as the ones you are discussing. Since what you offer—client, capital, or both—is relatively scarce, the threat of losing you will garner some attention.

  As you work toward closing the deal, take your time and get it right. Patience is a quality that rewards the well-prepared investor-negotiator. In light of your strong alternatives, you should have no reason to be in a hurry. Let them know that you have all the time in the world to craft a very good deal.

  Of course, effectively conveying a patient attitude is easiest when it is true. Use time to your advantage by being prepared, starting early, refusing to be rushed, and avoiding deadline squeezes. Furthermore, reject any attempts to stampede you or coerce you into urgency. That is someone else trying to use the scarcity principle against you, and it is almost always based on false pretenses. You are investing for the long haul—much of your thinking should be in decades—and there is no reason to rush.

  Get Everything in Writing

  Deals of this sort are often closed with a handshake, and there is nothing wrong with a hearty grip to indicate concurrence. It bears repeating, though, that you want to get every agreed upon detail in writing. There should be no exceptions to this rule. Not only will this improve communication, but it will also make error-free implementation far more likely and will create a path to follow if a dispute should later arise.

  Over the years, we have seen many examples of “forgetfulness” on the part of financial people. One advisor could not remember the exact percentage that formed a client’s annual fee. Another was not sure of the precise terms of an investment product that he sold day in and day out for decades. Many forget the promises they make during pre-deal negotiations. Memorialize it all in writing. Good, clear, concise memos, agreed to by everyone, make for better working partnerships.

  Because industry and government have tried their best to hopelessly cloud the meaning of “fiduciary,” your agreement should define it in writing. You should ask anyone who will have power over your investments to sign a document acknowledging that they owe you the same duty that a trustee owes. Although a bit of a long-shot, getting this in writing might have the added benefit of weakening contractual clauses that force you into an industry-run arbitration system, since fraud in the inducement of the agreement could render it void.

  This book argues that very few investments are uniquely valuable and most compete with very good alternatives. It is in the nature of financial markets that underpriced bargains and exclusive opportunities tend to get driven out. It follows that very few advisors, brokers, managers, or investment experts have something truly extraordinary to offer you.

  Of course, if an advisor did have something uniquely valuable to offer, he would be in a position to charge mightily for it.

  There is an apocryphal story about a uniquely talented expert that goes like this:

  A company developed an amazing monster widget-making machine. They had sent out invitations for a great demonstration and celebration. Government, press, and business leaders were all in attendance. A few minutes before the start of the event, with the grandstands full, television cameras trained on the dignitaries, and the place in a frenzy of excitement, the widget-making machine shut down. No amount of cajoling by the operators could get it to fire up. In a panic, the company president suddenly remembered that their most experienced old engineer had just recently retired. The president got him on the phone and pleaded with him to come in and get the machine working. The engineer finally agreed to come in and fix it but said that he expected to be paid as a consultant for doing so. The president, his terror subsiding, readily agreed.

  The engineer arrived quickly. He looked over the machine, taking special note of several tiny rivets on its surface. He then took a small hammer out of his bag and delicately hit one of the spots. The machine immediately sprang to life. The day was saved. The engineer put the hammer back in his bag and started out for home. The grateful president reminded him to submit his bill.

  When the bill arrived several days later, it read:

  For Services Rendered: $10,000

  The president called the engineer to express dismay. He protested that all the engineer had done was hit the machine with a small hammer. He sarcastically asked the engineer to submit a “more detailed itemized bill.” That second bill arrived the next day. It read:

  For Hitting Machine with Hammer: $1

  For Knowing Where to Hit: $9,999

  It’s a wonderful story with several lessons to teach us. Let us start, though, by pointing out that the tale supposes a unique and desperately needed skill. That is what many investment salespeople would have you believe about their wares. With the aid of hindsight and cold, hard, scientific facts, we know they cannot offer any such thing. If they succeed in persuading you, they will have turned the scarcity principle against you. Don’t fall for it.

  The engineer’s story also reminds us that it is critically important to “put it in writing,” avoid assumptions, and not wait until the last minute to get the help we need.

  The final phase of your investment negotiation concludes with an agreement that is reduced to writing in plain English. It includes terms that increase the likelihood of full compliance. You have gotten most of what you want and made sure all the others get enough to ensure their satisfaction. Furthermore, the deal is structured so that if, at any point, it is no longer good for you, there will be no trouble getting out of it. You obtained at least your fair share of the value created and made sure that nobody else is walking away with an excessive slice of the pie. Your patience and preparation have paid off. Well done.

  Chapter Summary

  The first stage of an investment negotiation is about getting fully prepared.

  The earlier chapters of this book create a checklist from which you can work.

  Continue gathering useful new data throughout the whole process.

  Take advantage of the second stage to learn all you can.

  Listen more than you talk and encourage them to be open with you.

  You are now in conversation with the biggest expert on the subject of “them,” so take full advantage of it.

  In the third stage, propose possible deals without getting locked into anything before you are ready.

  Trade what you need in exchange for what they want most.

  Be straightforward with them but cautious to check what they tell you.

  Be careful in the final stage to close a deal that the others will keep but that you can escape from if necessary.

  Prepare so that you won’t be hurried, and then be patient.

  Get everything in writing.

  Notes

  1. George Will, “The Wisdom of Pat Moynihan,” Washington Post, October 3, 2010.

  2. Robert G. Hagstrom, The Warren Buffett Way (Hoboken, NJ: John Wiley & Sons, 2013), 212.

  3. Robert B. Cialdini, Influence: The Psychology of Persuasion (New York: HarperBusiness, 2006), 237.

  PART III

  THE ECONOMIC TRUTHS YOU NEED TO KNOW TO BE AN EFFECTIVE INVESTOR-NEGOTIATOR

  Economists know a great deal. Study, observation, and compilation of data reveal new understanding on an ongoing basis. The knowledge that economic science has accumulated is worth a fortune to the investor-negotiator. For reasons only touched on in this book, however, most Americans invest as if this body of scientific knowledge did not exist.

 
As made clear in Parts I and II of this book, there are a number of steps necessary to consider yourself a good investor-negotiator. Among these are thorough preparation, a great deal of learning, careful planning, and familiarization with the vocabulary, customs, and standards of those with whom you will be dealing. To this partial list we can add taking full notice of scientific teachings.

  For our current purposes, the knowledge accumulated by economists can be broken into three categories: (1) the things they know, (2) the things they are aware that they don’t know, and (3) the things they are certain that nobody can ever know. Each of these has value to you as an investor-negotiator.

  This portion of the book will teach you, with a minimum of technical language or math, a number of these things that economists know. They are things that you need to know, too.

  Chapter 26

  Nobody Can Consistently Beat the Market

  Most people think there is some magic skill that, although vaguely defined, will lead to the best investors making tons of money by exploiting underpriced investments. In other words, they are thought to possess a special talent for finding bargains, buying them, and then selling them for a huge profit. People go to great lengths to develop this skill. Furthermore, they spend astonishing amounts of money hiring advisors they believe possess this ability. Unfortunately, there are really no such bargains to be had. Let me explain why.

  The Markets Are, for the Most Part, Rational

  An individual investor will have great difficulty doing better than the overall market by selecting individual stocks or bonds. Economists have long known that financial markets are rational; that is, such markets price assets based on all information known at the time. This is widely known as the rational market theory or, sometimes, the efficient market hypothesis. Burton Malkiel articulates this important idea with great clarity in A Random Walk Down Wall Street.1 In essence, the theory states that stock prices accurately reflect all the information that is known about a company at any given moment.2 This means that future price changes can be the result only of surprises or unexpected events. Since, by definition, surprises or unexpected events cannot be predicted, nobody can successfully know in advance about the future performance of a given stock.

 

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