Skin In The Game

In his book by the same title, Nassim Nicholas Taleb writes about the “hidden asymmetries in daily life”.  In Chapter One, Taleb writes, “Beware of the person who gives advice, telling you that a certain action on your part is “good for you” while it is also good for him, while the harm to you doesn’t directly affect him”.  Taleb’s book makes me think about the business of tenant advisory.  I can’t think of a business that fits more squarely into this narrative, especially here in the US where tenant advisors are paid by the landlord, not the tenant they advise.  There are so many aspects of the advisor/client relationship that are opaque.  In many markets, the common practice is for the advisory fees to be “per separate agreement”, meaning the client isn’t even aware of how much the advisor is being paid.  The company hiring the advisor has been subjected to a long standing market practice which causes it to believe that so long as they are hiring an advisor whom appears to have the right credentials and experience and such advisor is agreeing to be paid by the landlord, all is good.  But setting aside, for the moment, the matter of how tenant advisors are paid, it would seem, at a minimum, worthwhile for the client to clearly understand how much the advisor is being paid and what services are being provided to earn the fee.  It is correct for tenant clients to think about the leasing fee in this way and to hire their advisor based on a clear understanding of which one will provide the most relevant services which are proven to correlate most highly with the achievement of quality outcomes.  If the fee were being paid directly by the client, this would be a given.  And say nothing of the asymmetries between the amount of fee earned and the terms of the lease.  In most cases, these asymmetries are glaring.  For example, in some markets, fees are tied to length of term.  In others, they are tied to amount of rent paid.  So your advisor is paid by the counter party in the negotiation and is often paid more when terms are less favorable to you.  This asymmetry has always bothered me.  The only solution I’ve been able to find is total transparency such that our fees are always known and that the services we provide are correlated with the fee we earn.  I once had a client ask me to negotiate a lease expansion.  The market was very tight and the opportunity to extract meaningful leverage from the landlord was slim.  To my client’s surprise, I proposed an alternative strategy that would save them millions of dollars over the “captive” expansion.  They were grateful but insisted they wanted to proceed.  There wasn’t much to be done.  The fee was 6 figures and it felt poorly aligned with the value we were able to create so I proposed giving a large portion of it back to the client.  Their comment was they understood the risk associated with my business, they realized that much of the work I do is speculative (tenant advisors are not paid a salary, only commissions when/if transactions occur), so the fee is appropriate.  It is true, there is a high degree of risk in our work.  We often work for months (years) on projects for which we are never compensated.  But this dynamic only makes the opacity and asymmetry more pronounced, when the advisor’s incentive to close the deal is greater than its incentive to maximize client value.  Fortunately there are many excellent tenant advisors that rise above the structural challenges of our business to provide truly valuable services, to earn their fee.  Maybe there are similar asymmetries in your business?  I highly recommend Taleb’s thought provoking book.