Negotiating Your Investments Read online

  Chapter Summary

  The need to trust experts is a very long-standing problem.

  The traditional professions understand that care and safeguarding are an intrinsic part of professional work.

  True professionals go through a great deal of training and a lot of socialization.

  Members of the traditional professions sometimes disappoint, but, when they do, they are in violation of the basic tenets of their professional aspirations.

  Society makes a mistake when it lets anyone with high levels of skill call himself a professional.

  A true professional uses her skills, knowledge, experience, and training solely in the service of the client.

  Asking for such high levels of responsibility and trustworthiness from all who would call themselves professionals would greatly benefit everyone.

  Chapter 18

  Use the Power of Your Alternatives

  As discussed in Part I, power in negotiation comes from having a strong alternative—your best alternative to a negotiated agreement (BATNA). What will you do if the deal being discussed does not come to pass? The negotiator with the stronger BATNA has great power over the counterpart with the weaker one.

  Those trying to persuade you to make a particular investment have a big problem. They are faced with overwhelming competition for your attention and your money. Never forget that you have the choice to walk away from any investment proposal. At any given time, there is a vast array of investment choices that are seeking your consideration. In almost every situation you will encounter, those choices include some that are just as good, if not better, than the investment you were originally contemplating.

  What this means, of course, is that you hold the greater power in your investment negotiations. You are the one with the money in your pocket and an entire world of attractive alternatives for where you will invest it. It is a buyer’s market for those seeking to invest their capital.

  You may be surprised by the preceding paragraph. Very few investors feel that they have the upper hand when dealing with the financial services industry and its representatives. It’s true though; they need you to make their living and you don’t need them very much in light of all the other avenues you can pursue. That is one of the overarching themes of this book and one of the most valuable things I have to teach you. Don’t lose sight of it.

  Alternatives When Making Direct Investments in Actively Traded Securities

  As discussed earlier, investing directly by purchasing a stock on “the market” may not seem like negotiating. I have argued strenuously that it really is a negotiation and, indeed, it is exactly the kind of deal that this book was written to help you with. Nevertheless, I need to acknowledge the different kinds of investment negotiations.

  All right, I agree that buying a hundred shares of XYZ doesn’t really feel like a negotiation. It is certainly quite different from bargaining with a broker, advisor, or “rep” as to whether you will pay for her services or follow her advice.

  We can separate investment negotiations into two categories. The first is direct purchase of individual securities or other investment vehicles from the company or organization selling it. The second is investing through some broker, dealer, advisor, or other intermediary.

  When directly buying investments that trade on a properly functioning market, the invisible hand actually does the work of creating alternatives for you. The basic idea is easy to grasp. As economists know, properly functioning markets raise the price of bargains and pull down overpriced goods until every item is priced correctly in relationship to all others. As a result, every stock, bond, or other traded investment is priced appropriately by the market at any given time.1

  Why is this important? Because it means that all the investments you are considering are already at “the right price.” The stock of one company is not a bargain relative to that of other companies, absent unexpected or unknowable future events. Effectively, this means you have many equally valuable alternatives from which to choose.

  For example, if you feel a strong desire to invest in a large U.S.-based pharmaceutical company, there is no reason to believe that the stock of one large multinational drug company is better than another. Merck stock is not expected to be a better investment than stock in Pfizer, or vice versa. Of course, one of those two stocks is going to be better than the other over any given period in the future. But the market has priced them so that only events unknowable in advance will influence which appreciates more. And there is nothing that anyone can do to effectively predict unknowable future events. Anyone who tries to convince you otherwise is flying in the face of economic science and, mostly likely, trying to sell you something you are better off not buying.

  In a market full of appropriately priced alternatives, an investor need never be stampeded into a hyped or mispriced investment. When Facebook went public in 2012, to choose a recent example, many factors pushed the stock price high above a proper valuation. Wise investors knew two things that could help them avoid the trap. First, there were plenty of alternative investments to make in lieu of that young company’s brand-new shares. Second, Facebook would soon trade on a very liquid market that would eventually result in more realistic market-based pricing of its shares.

  Turning back to the example of stock in Merck and Pfizer, there is no way of knowing which will appreciate more in the future. (Keep in mind that at the current moment there are millions of investors making a bet on each of them.) Indeed, absent transaction costs, the better move may be to buy some shares of each. In any category or asset class, you will find many alternative possibilities. This means that there is no overwhelming imperative to invest in any particular one. Even better, you are free to bypass all those investment vehicles that are excessively difficult or expensive due to complexity or added costs. You don’t need any one particular investment. This ability to go down a different road with minimum harm to your own situation is the very definition of power.

  Alternatives When Investing Through Intermediaries

  Investing through financial intermediaries is more easily recognized as a process of negotiation. A person or company seeks to guide your investments in exchange for fees, charges, commissions, or some other combination of payments. You are dealing directly with someone and the terms and conditions of the financial relationship are subject to change (whether they wish to admit it or not). You are in a position to bargain in pursuit of the best possible outcomes.

  These intermediaries are middlemen. They necessarily add an extra level of complexity to the negotiation. You may find yourself involved in more than one negotiation simultaneously. For example, when a broker suggests buying something on which she earns a commission, both the matter of the investment and the terms of the commission can be subjects of negotiation. Furthermore, the very existence of intermediaries increases the cost of investing. They must contribute real value to be worth anything at all. Making sure they contribute such value, and holding its cost down to a minimum, is part of your job as an investor-negotiator.

  Consider investing with a large, multiservice investment company. These are the giant multinational financial services companies you read about in the press and advertisements. They offer one-stop shopping and internationally known brand names. If you wanted to work with one of these firms, you would apply the entire negotiation process from Part I in this book to shopping and coming to terms with them. Your pursuit of best outcomes requires bargaining with them. (Of course, these companies desperately want you to see the process as anything but a negotiation.)

  What is your alternative if you don’t like what one of these companies is offering you? As you probably realize, it is to do business with large investment company number two, which has an office across the street. These firms are in competition with each other for your business, and they offer pretty much the same services. The investor-negotiator has strong alternatives and, therefore, the greater leverage.

  Furthermore, these financial c
ompanies are in a business that has long been extraordinarily profitable. Such extreme profitability has resulted in many players trying to poach some of this business. Insurance companies, banks, credit unions, mutual fund companies, and others have all moved into the investment advisor space. They all offer more or less the same things to investors. Negotiate with them to your heart’s content, secure in the knowledge that if they won’t give you the deal you want, you can always move across the street to the next one. You have a multitude of alternatives, and so you have tremendous negotiating power. (The critical question about whether you want what they are selling is handled elsewhere in this book.)

  Among these competing industries, insurance companies merit special caution. For the most part, they sell various types of insurance dressed up as investments. This has proven to be extremely lucrative for them and usually a terrible deal for the investor. Their complicated, sleight-of-hand products significantly raise costs. Your best choice in this case is to just cross the street in pursuit of better ways to invest.

  Mutual fund firms have a long history of offering their original product. A mutual fund is an individual company whose purpose is for investors to gather their money and invest together. The benefits of this include significant diversification and economies of scale. They also claim advantages of “professional management,” although that claim is probably unsupportable in light of economic knowledge.

  Recently, traditional mutual fund companies have started offering other services to compete and capture more of the consumer wallet. Many now offer checking, cash management, and credit cards much like banks do. Some want to sell you “financial advice,” presumably about which of their ever-growing stable of financial products is best for you. A few will even try to sell you insurance, mortgages, and other lucrative financial products. As a result, the lines are becoming blurred between these firms and other financial services companies.

  Mutual funds themselves have much to recommend them. As previously mentioned, they can bring you the benefits of very broad diversification at low cost. There are measurable savings when thousands of investors work together. And the people running a fund are “insiders” who can avoid some of the costs extracted from outsiders and rookies. While shares of many mutual funds can now be bought from all sorts of firms, costs are often minimized by getting them directly from the company running the fund. Typically, though, mutual funds run the gamut from reasonably priced to obscenely expensive. Exploring your alternatives and knowing your BATNA will be critical to dealing successfully with any mutual fund company.

  Another alternative is to work with an independent investment advisor. These practitioners go by many names, with different identities, business models, and ways of getting paid. They are regulated by different governmental entities and don’t even all have the same level of duties to their client. As a result, it can be difficult to compare them in an apples-to-apples manner. To put it bluntly, the whole thing is a big mess. Furthermore, many of them are so tied into the large financial companies that it can be hard to determine with which category you are dealing. (If the answer is both, you are likely to incur far too much intermediary cost drag.) The Dodd-Frank law passed in 2010 was, among other things, supposed to make this situation better.2 So far, though, it has failed miserably in that respect.

  To the extent that investment advisors are independent actors, though, they are ripe for negotiation. You can be very assertive with them in shopping, questioning, requesting, demanding, and reviewing. You can often bargain directly with the owners or decision makers. They have real discretion. They need you because their business can make money only through clients with capital. And frankly, many of these firms have such high profit margins that they can easily grant you a discount without threatening their ability to pay the rent. Of course, these folks tend to be very savvy businesspeople and extremely money focused. While some are hungry, many are not desperate. Successful people in this field make so much that they can afford the luxury of turning away some new business. Just because they can offer you a better deal does not mean they will wish to. There are few things as unpleasant to a small businessperson as cutting prices or watching margins shrink.

  With regard to independent financial advisors, you may find that you are a good negotiator and she is a good negotiator. Such a circumstance can be very positive and holds out the promise of reaching an excellent deal that maximizes value for everyone. Your job though, as an investor-negotiator, will be to employ all the tools and methods suggested herein. Of particular importance will be your skill at analyzing alternatives and using your BATNA. Remember that negotiating strength does not come from wealth or connections. It is derived from having stronger alternatives. You are the one with the power to move yourself and your cash on to another advisor down the block.

  With So Many to Choose from, You Can Demand What You Want with Confidence

  When negotiating with investment advisors, or any service provider, it is critical to fully understand what you will get from them, what that is worth, and what you are actually paying for it. Providers have a great deal of opportunity to manipulate exactly what the client receives. It is all too easy for them to grant a discount and then reduce the service or product to pay for it. As always, caveat emptor.

  One of the things well-prepared negotiators have is self-confidence. That is a big piece of what this chapter is all about. If you have solid alternatives and a relatively strong BATNA, there is no reason for you to have less than complete self-confidence. You are the one in charge, and I want you to feel that, understand it, and act on it. A large part of the financial services industry’s modus operandi involves making you feel weak, unsure, and afraid. What this chapter points out, though, is that you are the one who has alternatives. You are the one in the negotiating power position. You are actually the one who can easily say no. You should do so without hesitation if you are not getting exactly what you want. And what you want, of course, is exactly what your preparation (including this book) indicates will lead to the best outcomes for you.

  Chapter Summary

  You are the one with the greater negotiating power.

  For direct investments, the market automatically provides you with many strong alternatives.

  For investing through intermediaries, the very competitive nature of the industry gives you access to strong alternatives.

  The big “name brand” financial companies have many competitors offering essentially the same things.

  Insurance companies are not a wise choice for investment guidance.

  Mutual funds have many favorable attributes, but beware of fund companies trying to sell you other investments and services.

  The pricing on mutual funds ranges from bargain to absurd rip-off, so be careful.

  For a number of reasons, independent registered investment advisors are ripe for negotiation.

  When you have strong alternatives, you can demand what you want.

  When your best alternative is strong, you should negotiate with confidence.

  Notes

  1. Eugene Fama, “Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance 25, no. 2 (1970): 383–417.

  2. www.sec.gov/about/laws/wallstreetreform-cpa.pdf.

  Chapter 19

  Knowing Your Interests and Theirs

  Interests can be thought of as what someone really, really wants. They are the deep truths that lie below positions and issues and they are comprised of every preference, want, concern, need, and fear that a negotiator brings to the table. Good negotiators concentrate very hard on interests, for they are ultimately of greater importance than the positions staked out by the parties. You should work hard to examine and understand the interests of all the parties involved as you negotiate your investments.

  Understanding Your Own Interests

  Start by understanding your own underlying goals and interests. Take a deep look. What lies below the surface of what you think you want fro
m your investments? Be careful; we often try to fool ourselves about our deeper motivations.

  Think back, for a moment, to what constitutes a good outcome for an investor. The focus there was on your broad objectives and the things that might get in the way of achieving them. It had a particular emphasis on avoiding distractions and wrong turns that could lead away from where you really want to go.

  Now we are shifting attention to the specifics of exactly the things you seek to achieve. What do you really want from the process and acts of investing? In the final analysis, these answers must come from you. The next few paragraphs offer a partial list that you can use as a starting point. These are underlying interests that resonate for most investor-negotiators. In particular, these items relate to a negotiation with financial service providers.

  Low Costs The desire shared by almost all investors, to maximize returns, makes it important to hold down the costs of investing. You will soon learn that every dollar lost to excessive costs is one dollar of reduced investment return. Avoiding inflated or hidden costs will directly advance your pursuit of higher returns.

  Clear and Complete Explanation of Costs and Fees In order to effectively negotiate about costs, you will need to know what they are. This is not always as easy as it sounds. Therefore, one of your interests is to be honestly, clearly, and completely informed as to how much it is all costing you.