Intermediaries

After church last week, a member caught me and asked for help on a financial matter. He had intended to purchase a CD and name the church as its beneficiary. A financial advisor at his bank suggested a “better investment” with “higher returns.” The member wasn’t sure what the investment was and wanted some advice.

I called the financial advisor to get a full prospectus in order to understand the underlying investment and its risks to go along with the purported higher returns. That was two weeks ago and neither I nor the investor ever heard from the financial advisor. The jury is still out on that investment, although maybe the reason we never heard from the guy is it wouldn't withstand the scrutiny. In any event, it got me thinking about intermediaries—those people who stand between you and a desired transaction.

Intermediaries are neither inherently good nor inherently bad. The financial geek in me is interested in how intermediaries provide value (and what they are doing to make money). The mystery writer part of me looks at them as great fodder for crime plots. The initial victim in my novel BAD POLICY is the owner of an insurance brokerage (an

intermediary) that turns out to have been crooked in a perhaps unique way.

In my youth, you needed an operator to make a long distance call. All phone calls to a business had to go through their switchboard operator because direct lines were too expensive. Once, the ONLY way to make an airplane reservation was through a travel agency, and the only way to buy insurance (life, auto, house) was through an agent.

Technology has reduced or eliminated some intermediaries. We direct dial our phone calls, although we can still pay for directory assistance, and for an extra fee these people will place the call. Travel agencies and insurance agencies still exist even though most airline tickets are purchased online and some insurance coverage is available online.

As technology flattens some intermediaries, new intermediaries do crop up. Instead of using travel agents for routine travel, people use companies like Travelocity to shop for them.

With only a little bit of thought, it’s clear a functioning modern society requires intermediaries. (Consider life without shops and grocery stores.) An effective intermediary must have something you require or desire in order to make a transaction. Sometimes it is technology (the historic telephone operator could connect the plugs, you could not); sometimes it is knowledge (once only travel agents had access to information about flight timetables and costs); sometimes it is convenience. (I’m willing to pay more to a grocery store for one-stop shopping than to go to the butcher, the baker and the candlestick maker.) Sometimes they sell access to people, in which case they are providing value to those seeking access and those of whom access is sought (for example, the administrative assistant to a corporate CEO).

Finally, to be effective, intermediaries must charge an amount that you consider worth the value you are receiving (or hide the charges so you don’t understand them).

Financial intermediaries (stock brokers, insurance agents and the like) often charge commissions (which you can ferret out) and receive various legal kickbacks (which you can rarely suss out). If readers want examples, I’ll gladly provide some in comments. Literary agents are similar.

Publishers used to hire readers to go through slush piles. Large publishers have all but eliminated these intermediaries and instead have transferred that function to literary agents. Publishers recognize that for an agent to make money (from commissions) they have to sell the publishing houses something valuable enough to make both parties money. Agents provide authors access to big publishing houses and simultaneously provide knowledge of publishing buyers to the authors. For these services they generally pay themselves 15% of the author’s revenue.

Many authors are questioning whether agents continue to provide sufficient value. Because of corporate consolidation, there are far fewer large publishing companies today. Also, traditional publishing companies have locked their financial stability into print medium—yet more and more author income is being generated through e-book sales. Lots of ink (and e-ink) has been spilled on the state of book publishing. I’ll not add to that; instead I’ll focus on the literary agent compensation issue.

Careful reading of an agent’s contract will disclose the commission they charge and what, if any, extra expenses they require the author to reimburse from royalty income. It behooves any author signing an agent contract to understand those basic compensation issues.

But some agents and agencies no longer solely receive compensation based on an author’s royalties. They have expanded their business practices to book editing, self-publishing, paid marketing and so on. [Here’s an external blog with more details. https://davidgaughran.wordpress.com/2013/04/22/lazy-literary-agents-in-self-publishing-money-grab-via-argo-navis/ ] If agents performed the work themselves, fees would be clear. However, all these services are hired out—and the missing piece for authors to completely understanding agent compensation (and therefore motivation) is what portion of those costs is being paid back to the agent.

Before the addition of these extra services, agents had to believe in a book sufficiently to put their financial welfare on the line with the author’s. There were only so many clients they could actually serve, and 15% of a couple of thousand dollars doesn’t pay the rent for long. Now, however, if they can get the author to pay for editing services, marketing services and self-publishing services—none of which take the agent much time to recommend—and the agent gets payment from the various providers for their recommendation, the math is different. The more authors the agent can steer down the nearly-self-publishing path using their recommended outside providers, the more money the agent makes.

In such a situation the agent is no longer working for you; you are the pigeon for the agent.

Not all agents have chosen this model, but until this shakes out, authors must protect themselves. They must fully understand all the compensation an agent will receive and from whom they will receive it. Only then can they fully evaluate advice an agent offers.

Caveat emptor is always required with financial intermediaries. With the tectonic changes occurring in publishing, literary agency practices should be under our microscope.

~ Jim