Few of us love buying a car. Well, we love picking out the car, but
negotiating for it—not so much. Yet all the dreaded research, haggling,
and back and forth with salespeople are needed to get you to a price you
can live with on a car you want. Imagine if, instead, you let a “car
advisor” who works for the manufacturer make all the decisions for you.
You’d be greeted at the car lot by a guy in a pin-striped suit who tells
you he’s your car advisor. His job is to analyze your needs and make
guesses about the future to select the best car for you.
There might be an arduous process of questionnaires, meetings, and
investigations into your automotive history. Finally, after much
analysis and input from many experts, you would be handed the keys to a
Toyota Camry. There would be no room for haggling; you must pay whatever
price they say. And not only do you have to cover the cost of the car,
your “car advisor” informs you you’ll be paying for all that analysis,
too. This guy is not working in your best interests—he’s trying to sell
you a car! Sounds ridiculous, right?
Sure it does, says Steven G. Blum—but it should also sound familiar.
That’s because it’s similar to how most people invest. And what we
should ask ourselves is why we accept this process…when, really,
investing is no different from any other big transaction.
“Though too few people realize it, the care and management of your
financial life is best seen as a series of negotiations,” says Blum, who
teaches at the Wharton School of Business at the University of
Pennsylvania and is the author of the new book, Negotiating
Your Investments: Use Proven Negotiation Methods to Enrich
Your Financial Life (Wiley, 2014, ISBN: 978-1-118-58307-4, $40.00, www.negotiatingtruth.com).
“As an investor you’re seeking a deal in which you will exchange payment
for some instrument that you hope will appreciate in value—a stock, a
bond, or some sort of commodity. Both sides, you and the sellers, are
looking for as much value from the deal as possible.”
Negotiating Your Investments is an in-depth guide to applying
proven principles of negotiation to your personal finances. With expert
insight into the before, during, and after of a successful negotiation,
you’ll learn how to prepare for and conduct important financial
discussions with an eye toward getting the best possible outcome.
“Americans waste billions of dollars paying too much to the financial
industry,” says Blum. “For many families and individuals, that waste
totals well into the millions. Failing to understand these transactions
as negotiations sets you up as prey for those who do. Too many people
follow investment recommendations with the trust and passivity of lambs
being led from the barn.”
Read on for a few tips to help you negotiate your way to better, more
profitable investments.
Know what you don’t want, what you do want, and what’s even better.
One of the most important things a negotiator can do is figure out what
she is trying to gain or achieve. As simple as it sounds, many people
don’t truly know their own motivations. Once you remedy this problem,
you can be purposeful in keeping the process moving toward your goals
and avoiding measures that might throw you off course.
“People invest for many different reasons, and their goals reflect
this,” says Blum. “Most of the motivations driving investor behavior can
be divided into the following categories: to be safe, to be clever, to
be wise, to feel connected to a peer group, as well as to make money.
These different kinds of goals can be useful in examining your own
desired outcomes. Consider which of these groupings may play a part in
your own goals, hopes, and targets.”
Be aware that you’re on an uneven playing field. Knowledge is
power, and in the financial industry that is especially true. Most
advisors have command of a great many tricks of the trade that are far
beyond the knowledge of even very smart regular people. The result is an
uneven playing field between the financial industry and the client.
Because they know a great deal that you don’t, you are badly
disadvantaged and very vulnerable to being manipulated. Among the
consequences of this knowledge imbalance are overcharging, underserving,
moving bad merchandise, guiding business to friends (or reciprocators),
hiding fees, selling things that have no value, misleading, stealing,
taking credit unfairly, and claiming random chance as skill.
“So, how do you avoid suffering as a result of this information
asymmetry?” asks Blum. “One answer is to learn more, although in all
fairness you’ll never be able to level the information playing field
with those who work in that field every day. Also, be very careful about
whom you hire as your advisor. Look for people whose best interests
require that they remain trustworthy.
“Really, there is no single answer,” he adds. “The best advice is not a
prescription but a set of cautions and admonitions. Stay vigilant. Don’t
trust imprudently. Be keenly aware of the problem of asymmetric
information and constantly on guard to avoid being its victim.”
Watch out for conflicts of interest. In the financial services
industry, these are varied and complicated. Not only are there
money-related conflicts like commissions and fees, sales quotas, and
pay-to-play schemes, there are others, like time itself. Financial
advisors are under constant pressure to bring in new clients and more
revenue. Every hour spent serving you is time away from those other
tasks. His haste to move on to snagging new clients and the pressure
he’s under to increase revenue could very well affect how he handles
your money.
“Such conflicts of interest aren’t easily mitigated,” says Blum.
“Fee-only advisors, who are compensated based on agreed-upon rates, may
avoid some of the conflict problems that commissions generate. This is a
step in the right direction, but it doesn’t eliminate the problem.
Consider, for example, what happens when the client asks a fee-only
advisor about the wisdom of paying off a mortgage early. He may be loath
to recommend a payoff when the funds used to reduce that debt will mean
less money available to invest, and in turn, less revenue for him.
“The problem of conflicts of interest is neither easily solved nor
likely to go away,” he adds. “Careful attention to it, though, can give
rise to dramatically better results.”
Beware of “beat the market” promises. The rational market theory
states that markets price assets based on all information known at the
time. In essence, the theory states that stock prices accurately reflect
all the information that is known about a company at any given moment.
This means that future price changes can be the result of only surprises
or unexpected events. Since, by definition, surprises and unexpected
events cannot be predicted, nobody can successfully know in advance
about the future performance of a given stock.
“Taken to its logical extreme, a monkey throwing darts at the stock
market page of the newspaper should be able to perform as well as anyone
else,” explains Blum. “My Economics 101 professor introduced me to the
theory by allowing my classmates and me to choose five stocks any way we
wished, including asking anyone we knew, while he threw darts at the
Wall Street Journal.He beat most of us.
“The bottom line is that an individual investor will have great
difficulty doing better than the overall market by selecting individual
stocks or bonds,” he clarifies. “Will some pickers be able to beat the
market from time to time? Yes, but their success is primarily just a
reflection of random chance. Anyone who tells you they can do it all the
time is dishonest or deluded.”
Don’t get distracted by side issues. We are competitive by
nature, often driven by the desire to win. But this desire can get you
into big trouble when negotiating investments. It can cause you to get
distracted by small battles and side issues, taking your focus away from
achieving your best outcomes.
“The vision of a good outcome I bring to my own investing is
straightforward,” says Blum. “I seek to make the maximum amount of money
while avoiding excessive or undue risk. Furthermore, I demand
transparency of fees—hidden costs strike me as dishonest trickery. Like
most people, I do not wish to pay even a cent for anything that economic
science can show is actually worthless. I will not pay anyone to gamble
for me. I never want to feel that I am being cheated, lied to, or played
for a fool.
“Achieving best outcomes requires avoiding actions that may look
inviting but actually lead in other directions. An investor-negotiator
should constantly ask herself whether a given move really leads to her
ultimate goals,” he adds. “If it doesn’t, just say no.”
Don’t pay for anything that isn’t fair or doesn’t provide value to
you, period. Of course,nobody should be expected to work for
nothing, and skilled assistance is worth paying for. On the other hand,
excessive fees, even those that seem “reasonable,” can be extremely
costly over time. That’s why Blum recommends following two rules when it
comes to settling on fair compensation for financial advice. One, “Fair
terms or no deal.” And two, never accept “we’ve always done it this way”
as a reason to agree to pay an advisor a certain amount.
As you negotiate over fees and costs, you will surely encounter the
argument that 2 percent of your capital is just a tiny amount to pay for
good help. Be careful here, for it is a mistake to examine fees in
relation to the amount of your capital. Rather, compare fees to your
expected return on the capital. Let’s take a look at the 2 percent deal.
One dollar, earning a return of 8 percent over 30 years, will grow to
$10.93. Reduced by costs of 2 percent, though, an after-fee return of 6
percent will be achieved. And a dollar growing at 6 percent for 30 years
will become $6.02. In this example, a “mere” 2 percent fee reduces the
return by almost 45 percent. When we put it that way, does it seem fair?
“And if legitimate investment services with excessive costs are bad,
services that add no value to you are a terrible deal at any price,”
adds Blum. “As mentioned, most stock-picking strategies perform no
better than throwing darts at the Wall Street Journal. This means
a great deal of the investment advice and services being offered are
worth nothing to you. Financial companies seek payment for the playing
out of random chance. Even if such firms spend millions of dollars on
salaries, computer programs, and high-priced New York rents, their
services are overpriced at a nickel.”
Harness the power of BATNA. In negotiation, power comes from
alternatives. One of the first things a skilled negotiator explores is
what course she will take if the deal being worked on completely falls
apart. If I can’t make this arrangement with this person work out at
all, what will I do instead? Answering this question leads you to your
Best Alternative To a Negotiated Agreement (BATNA) and lays the
foundation for increasing negotiating strength. And greater strength
presents the potential for increased control, influence, and authority.
“To find your BATNA, carefully inventory all of the alternatives
available to you,” recommends Blum. “Once the very best alternative is
identified, it gets labeled as your BATNA. This gives you a powerful
floor to support your negotiation effort. You will never accept a
deal unless it is better than your BATNA. It forms a minimum acceptable
level for you. It is said that a strong BATNA provides the negotiator
with both a sword and a shield. In other words, it allows her to be more
aggressive (offense) while also protecting her from making bad deals
(defense).”
Consider how you might create mutual gain. Remember the grade
school lunchroom: your grilled cheese for my turkey sandwich, your
cookie for my chips, and both of us happier? Essentially you and your
lunch buddy were deciding which options offered the most opportunity for
creating mutual gain. You asked yourselves, What can I trade to you
that you value more dearly, and what can I receive from you that holds
greater worth to me?
“Looking for mutual gain in investing is valuable because it’s a great
way to forge lasting relationships,” notes Blum. “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 well is the key to success.
“Be careful to structure agreements so that you get what you need
before, or at least simultaneously with, fulfilling the other party’s
interests,” he adds. “In short, craft the deal so that the rewards they
seek come only after you have received all that was agreed upon. With
those concerns in mind, try to work with them to put together the best
possible deal for all—a deal that will leave everyone much better off
than they started.”
Choose your words (and how you dole them out) wisely. How can you
let your advisor know of your requirements, interests, and inviolate
standards in the clearest way possible? You need to tell them explicitly
that any agreement must be better than your best alternative, meet your
interests well, and be demonstrably fair. It will also have to be stated
clearly in writing with all its terms verifiable. It cannot in any way
“lock you in” but, rather, must give you the right to step away whenever
you wish. How can you best communicate all this and more to your
partners in a manner that keeps the door open for fair and honest
dealing?
“Be warm and friendly in person yet firm and unyielding in writing,”
advises Blum. “You will want to follow up all conversations with letters
that summarize and confirm what was discussed. Those letters should make
clear the firmness with which you are insisting on your needs. Be
explicit in your written communications about your expectations,
requirements, deal-breakers, and understandings. Choose language
carefully, leaving no room for interpretation or discretion by those
whose interests may differ from your own.”
Ask lots of questions. A much-cited study found that skilled
negotiators spend almost 40 percent of their time acquiring information
(asking questions) and clarifying information (restating and reframing
what they’ve heard to verify that they’ve understood correctly). Average
negotiators spend about 18 percent of their time on the same behaviors.
In other words, average negotiators ask half as many questions as
skilled negotiators.
“The key is to ask previously prepared questions and, just as important,
listen well enough to pose precise follow-up questions,” notes Blum.
“Probing and clarifying the other party’s position requires that you
listen carefully and formulate good questions on the spot. Strong
listening skills, along with good preparation habits and the ability to
express thoughts clearly, consistently show up in the research as among
the top traits of the most effective negotiators.
“It’s critical to listen and absorb with discernment,” he adds. “The
information you receive will not all be accurate. There is usually an
incentive for the other parties to misrepresent certain needs or
interests. You can preempt bluffing with hard factual questions; it is
psychologically much harder to falsify numbers than it is to mislead
about the severity of a situation or the importance of an issue. Plus,
there is usually a way to check up on factual information.”
Don’t get locked in. Avoid situations or deals that tie you into
investments for long periods. Indeed, the shorter the better. For
example, you would prefer a contract that permits you to quit without
reason with five days’ notice to a contract requiring three months’
notice. A firm billing for services six months in advance locks the
client in to a greater degree than does their competitor charging only
after the work is completed. An agreement that can be terminated without
penalty, whenever the client wishes, is superior to one that imposes an
exit fee. That, in turn, is less onerous than one requiring significant
notice as well as imposing a price to get out.
“Be especially careful about exit fees,” warns Blum. “They’re really
penalties for trying to get your money back. For example, ‘back-loaded’
mutual funds sometimes charge 6 percent to get your money back in the
first year, 5 percent in the second year, and so on. The right to your
own money without penalty will not be granted until six years after the
fund was purchased. Most variable annuity products have a similar ‘early
exit’ penalty.
“As an investor-negotiator, you must examine carefully how any proposed
commitments will actually work,” he continues. “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.”
“To revisit the car buying analogy, just as you wouldn’t accept a ‘car
advisor’s’ suggestion and pricing outright, it would be unwise to go to
a car dealership before you’ve sufficiently armed yourself with the
information you need to negotiate a fair price for the car you want to
buy,” says Blum. “I’m urging people to take those same steps before they
make investment decisions. Arm yourself with the knowledge and skills
you need to make truly fruitful financial decisions. Use negotiation to
protect yourself from being taken advantage of by an industry that is
counting on your lack of knowledge and preparation. Let’s make sure they
are underestimating you.”
Wiley
Melissa Connors, 201-748-6834
Publicity Manager
mconnors@wiley.com