Negotiating Your Investments Read online

  A few years later, I got lucky again. After working for a number of years at Dartmouth College, I was asked to take a position at the University of Pennsylvania. My practical negotiating skills came in handy as I was able to persuade Wharton to let me teach a version of what had so delighted me at Harvard. (To be more accurate, I negotiated my way into taking over a class for Professor Edward Shills when he fell ill.) I have been teaching there ever since.

  With intellectual leadership from Chairman Richard Shell, pedagogic development by colleagues such as Maurice Schweitzer, Adam Grant, and Jennifer Beer, and extraordinary promotion by Stuart Diamond, a remarkable core of thinking and writing about negotiation has grown at Wharton. And, of course, I have been one of its greatest beneficiaries. In teaching negotiation and conflict resolution at Wharton for over 20 years, I have also been a continuous student of the techniques, methods, skills, and habits of mind that make a negotiator successful. My own proficiency has improved continuously through teaching, thinking, practicing, and paying attention to colleagues. I am deeply enriched by the process of guiding new students through the stages of learning about what negotiation is, how it works, and how to do it better. It continues to be true that I learn something new every time I teach.

  The subject of my classes has the power to change lives. It changed mine, and students regularly report that it changes theirs. Part I of this book, along with the writings of some of the teachers and scholars I have mentioned, can start you on the path to making such changes in your own life. You can become a better negotiator and apply those skills to almost every sphere of your interactions with other people.

  The intention of this book, though, is to focus on a single area where application of these powerful negotiation methods can bring extraordinary results. Using the tools and techniques of negotiation in your financial life can bring remarkable monetary rewards. The first step is to recognize that your finances are a series of negotiations. Having mastered the mind-set and skills of an excellent negotiator, you will view your financial interactions in a completely different way. The financial services industry and its representatives sit on the other side of the negotiating table from you. A skilled negotiator will act very differently than does a passive client. Your new proficiency will help you more than you might believe possible.

  This book centers particular attention on investing. As you will see, making an investment is best understood as a process of negotiation. You are seeking to obtain an ownership interest in something on the most favorable terms possible. Someone else is trying to sell that interest to you, and, naturally, they are trying to get the best of the deal. When scrutinized from this perspective, certain wise moves become apparent. Investing, it turns out, is just as subject to negotiation methods as are buying a car, asking for a raise, or selling a franchise.

  As with negotiation, generally, my understanding of investment as negotiation comes from both the academy and the real world. Not only have I been teaching at Wharton for two decades but I have also simultaneously been a working practitioner. After completing law school, including a second law degree in taxation from the renowned Graduate Tax Program at the New York University School of Law, and practicing for a number of years, I came to realize that I didn’t enjoy being a lawyer. I longed to work more closely with individuals around their real-life problems. When questioned by loved ones, I often expressed my desire to become “a counselor, or minister, or rabbi; someone with a flock of real people I could guide.” After some years in the vocational wilderness, a stern friend took me by the shoulders. “Listen,” she said, “you know taxation, estate planning, investments, law, and money, and you can’t figure out how to help people? Those are the very things about which most people desperately need guidance.” So, with her voice ringing in my ears, I hung out a shingle. That is why I love to claim, with tongue in cheek, that I invented what is now called “wealth management.” The idea of putting tax and estate planning advice together with investment guidance eventually dawned on the financial services industry as a more efficient way to sell their products. It had come to me, years earlier, as a way to transition from lawyer to useful counselor.

  I have been guiding my clients through their financial lives for many years. My colleagues and I get very good outcomes for each of them. Why wouldn’t we? We apply the tools of a world-class negotiator to each aspect of a client’s financial needs, and ask the appropriate questions. We prepare fully, learn and gather all relevant information, look for opportunities to align interests with those who work on our client’s behalf, and avoid binding commitments unless they are tremendously to the client’s benefit. We also search for better alternatives, insist on fairness, communicate clearly, never try to take advantage of others, and use time to our client’s advantage. We know what relevant experts (economists) believe to be true and what they know to be nonsense. We study those subjects where study bears fruit. We are always trustworthy but not necessarily trusting. In other words, we guide our clients through financial life as befits a thoughtful negotiator trained at Harvard and Wharton.

  As Part II of this book will demonstrate, you can do that, too. I will show you how to approach the financial portions of your life as ongoing negotiations. You can apply the tools, skills, and knowledge of the best negotiation experts. And you can come away with dramatically better outcomes that will leave you far richer than you would have otherwise been.

  Among the things that top-flight negotiators do without fail are preparing fully, knowing their subject matter, claiming their fair share of value, and getting advice from the right people. In direct contrast, they meticulously avoid bargaining in relative ignorance, paying too much, being maneuvered by those with conflicting agendas, and getting played by those who have access to better information. There are certain basic truths you need to know if you are to succeed in negotiating your investments.

  Part III of this book is designed to teach you what you need to know to do a great job as an investor-negotiator. It will supply you with much of the information, knowledge, and insight required to prepare, gather, understand, and judge potential agreements. You will go to the bargaining table armed with, among other things, the knowledge accumulated from a century of economic study. A top negotiator would be sure to have this information at hand—you will do the same.

  The skills this book will teach you are worth a remarkable amount of money. Part III offers you tools for figuring out just how much is at stake in your unique situation. You may be as astonished as I was at the beginning of my studies. This book can, quite literally, be worth a fortune to you. I certainly hope it will be.

  Feel free to let me know how you do with this. I am, first and foremost, a teacher, and I want to know how my students are doing. You can write to me at: [email protected] and let me know what works, what doesn’t, what needs improvement, and what is just right. You can also let me know what amazing (or horrible) things you see out there as you negotiate your way to a brighter investment future.

  Acknowledgments

  I am grateful to many people. Like most things of value in life, this book would not have been possible without the help of numerous colleagues, friends, and loved ones.

  My gratitude to Marcia Layton Turner is immense for all her help with writing, motivation, and navigation. I am also thankful to Tricia Jain and Matt Crespi, two former students who contributed greatly to this project.

  I am deeply indebted to Judy Tanur and Jennifer Beer for their help in transforming earlier writings into a final draft. Both of them are extraordinary teachers and writers as well as respected academics.

  Moving from idea to expression is not always easy. Thank you to Dr. Diane Roston and Dr. Phineas Baxandall for guiding me. Marianne Weingroff commented on an early draft in very helpful ways. Just as he did when I was in college, my old professor Richard Ohmann keep me thinking straight and refused to let me get away with too much nonsense.

  Mary Bonfini and Dr. Dirk Holden were inval
uable in keeping the ship steady while I searched for my muse. Similar thanks to Henry Bartechko, Joan Multer, and Annmarie Sheehan. I am also grateful to Gil Stein, David Miller, Paul Harris, R. Scott Taylor, Ina Shea, and Anne Shehab. Margy Klaw, a superb lawyer, blazed the trail as a writer.

  My students have taught me a tremendous amount over the years, and I wish to acknowledge them all. As for my teachers, I owe them so much and can hope only to make partial repayment by giving others some small measure of what they gave to me. I am particularly grateful to the professors, scholars, and practitioners with whom I worked at the Program on Negotiation at Harvard Law School. I also want to thank my teachers at Wesleyan University, Northeastern University School of Law, New York University School of Law, and Harvard University.

  Everyone in the Department of Legal Studies and Business Ethics at Wharton deserves my gratitude. Faculty colleagues have been extraordinary. The department staff has been kind and helpful. Tamara English and Lowell Lysinger merit particular appreciation for their tireless assistance. Richard Shell is not only a leader in the theory and pedagogy of negotiation as an academic subject but also our chair. Amy Sepinwall, Alan Strudler and Bob Borghese come in for special thanks. The Wharton School of Business and the University of Pennsylvania generally have been a professional home for two decades. The support of those institutions has been a gift.

  My thanks to everyone at Wiley for shepherding this project into print. In particular, Judy Howarth, Laura (Walsh) Grachko, and Tula Batanchiev have been lovely to work with.

  I am a part of all that I have met.

  Steve Ritz, Alvin Peters, Angelo Bellfatto, Dic Wheeler, Liza Baron, Peggy Grodinsky, Karen Bleich, Marcia Tanur, and Donna San Antonio are dear to me and deserve part of the credit for anything I ever accomplish. I could not have done this without you.

  Finally, I am most grateful of all to Adam, Libby, and Suzie for supporting the writing of this book, even when it wasn’t easy to do so. And for loving me almost as much as I love each of them.

  Introduction

  A primary tenet of this book is that the actions necessary to take good care of your financial life, including making investments, are a series of negotiations. The world’s most sophisticated investors know this very well. It is a recognition that is ignored only at one’s peril.

  When Henry Kravis entered into a deal to buy RJR Nabisco through a leveraged buyout, he understood that his company was entering into an epic negotiation. Two years earlier, though, when Sam Rizzo bought a few shares of RJR Nabisco as an investment for his family’s future, he had not the slightest thought that he was entering a negotiation.

  As Facebook prepared to go public by issuing stock in 2012, Mark Zuckerberg, Sheryl Sandberg, and all the attendant lawyers and investment bankers behaved as if they were getting ready for one of the biggest negotiations they would ever be part of. On the other hand, many thousands of investors and speculators who bought those shares failed to see themselves as negotiators on the other side of the table.

  When Goldman Sachs created the ABACUS CDO investment product to facilitate an investor’s plan to short the mortgage market, Vice President Fabrice Tourre and his team knew they were engaging in a complex multiparty negotiation. The German bankers who bought the product as a long-side investment did not seem to share the same realization.

  Failing to understand your financial transactions as acts of negotiation sets you up as prey for those who do. Almost everyone you know recognizes that one must negotiate skillfully to buy a piece of property. Those same people, though, buy investments (also a kind of property) with the trust and passivity of lambs being led from the barn.

  To the RJR Nabisco, Facebook, and ABACUS examples can be added a hundred more drawn from everyday financial transactions. Let me offer a few:

  Choosing to work with a brokerage or investment firm

  Selecting an independent investment advisor

  Buying a mutual fund

  Looking at homes with a real estate broker

  Buying a bond that is callable by the issuer

  Choosing a type of checking account offered by the local bank

  Selecting a credit card and then using it

  Deciding on an insurance broker and then buying life insurance through her from a given underwriter

  Even buying a book full of investment advice is a negotiation.

  When lawyers from a major accounting firm suggested a tax shelter to some of their clients, it would have been savvy to compare the charges being levied with the anticipated tax savings.

  “Tell us,” the clients might have asked, “about how you guarantee your work. Will you pay all costs and penalties if the IRS rules the shelter abusive and illegal? Under what circumstances will you return your fee?” Thereafter, they might have considered getting all those answers incorporated into a written client agreement.

  Furthermore, when Bernie Johnson was sold a variable annuity product that he didn’t fully understand and would cost him over a million dollars of lost return in his lifetime, he did not see the transaction as a negotiation. Rather, he thought it more akin to purchasing medicine prescribed by his doctor. The gentlemen who sold him the annuity, however, understood all too well that they were on one side of a bargaining table and Bernie was on the other.

  At the time when Jack Dunphy bought shares in Hudson Technologies, Inc., online through a discount stockbroker, it would not have dawned on him in a million years that he was involved in a negotiation. Rather, he thought, the deal was quite like going to Walmart and buying a large and expensive loaf of bread. Jack attached no significance to the fact that he paid the “ask” price, which was over 10 percent more than the “bid” price for the shares. The market maker, somewhere in Manhattan, who pocketed the spread was far more cognizant of the parameters of the transaction. Indeed, she may well have examined it through the lens of a negotiation framework.

  How much might be at stake? As you will see in Chapter 35, the amounts to be gained or lost over a lifetime are huge. While failing to negotiate may not leave a fortune on the table in every single transaction, the amount in question is sometimes more than you would imagine. Furthermore, when you gather together all the investments you make in a lifetime, many millions of dollars are at stake.

  That may sound a little crazy. The first time I reread that sentence, I had to do a double take. It’s true, though. This book is full of information that will teach you to negotiate cost cutting and improved returns and, amazingly, those will be worth literally millions of dollars to you over your lifetime. Thus, my plea to you is simple. Take this seriously, read carefully, and don’t put off the learning and actions that are called for. Far too much money is at stake.

  PART I

  WHAT THE BEST NEGOTIATORS DO

  Becoming a better negotiator can improve your life. It can help you get more of what you want, attain a greater share of your goals, and better develop the ways you spend your days on this earth. Improving your negotiating skills is an effort worth making.

  The hill you must climb to strengthen your negotiating is not too steep. Part I of this book can guide you. Other books will be mentioned, and I encourage you to pick up a few of those as well. Read and think; it will bring good results. Beyond reading, the best way to become better is to practice. Happily, your life affords you almost endless opportunities to try out the methods and techniques this book will suggest. I urge you to supplement the book with practical application. As you learn about something new in these pages, give it a try.

  If I were somehow allowed to offer you only one thing to improve your negotiating, it would be this: If you prepare fully for each negotiation, you will do better. It is that simple. As a general rule, the more prepared you are, the better your outcomes will be. In any important negotiation, you should prepare as if it matters. Prepare as would an actor before a big performance, an athlete before an Olympic match, or a lawyer before a major trial. Preparation is something within your reach that can
directly improve results. It is there for the taking. Take it. Do your homework.

  You will do even better if you develop a framework around which to organize your preparation. The following pages will help you with that. Part I of this book offers you a way to think about negotiating. By breaking down any negotiation into its elements and stages, you will have a structure around which to build your preparation. Of course, as will be stressed, this preparation is not something you do only at the beginning of the negotiation process. On the contrary, you will be working on it right up until the end.

  Many of my students enter our class reporting that they are frightened or intimidated when they must negotiate. As the semester progresses, most feel those fears lifting away. At the very end of our work together, some tell me that negotiating has become fun. It is something I am always delighted to hear. So that is my goal for you, dear reader. I hope that Part I of this book strengthens your confidence, increases your skill, and leads you to see negotiation as both helpful and fun.

  Chapter 1

  What Is a Good Outcome?

  We start by thinking about the end. Why are we negotiating? What do we hope to achieve? What do we really want?

  This book begins, as do all my courses, with a question. Indeed, it is my favorite question in the world: What is a good outcome? It’s a playful double entendre, referring both to a specific situation, such as the negotiation you are currently working on, and to the question itself. What does the phrase good outcome really mean? This is the most serious question a negotiator could ask. After all, what is the point of negotiating if you end up with less than a good outcome? How, in turn, can you end up there if you cannot define it in advance? Understanding what a good outcome is generally and identifying what it will look like in any given situation are critical components of negotiating success.