Fiduciaries
Agents may be possessed of a thousand charms and skills but if they don’t handle your financial business reliably or honestly, nothing else counts. Although, as I have written, literary agents are not licensed or registered – at least not in New York City where most of them practice – they are fiduciaries, which the National Association of Personal Financial Advisors defines as “Professionals entrusted to manage assets or wealth while putting the client’s best interests first at all times.”
The fiduciary status of agents therefore imposes some fairly strict conditions on the way they conduct their business. Many of them are spelled out in the Canon of Ethics of the Association of American Literary Agents. Members of AALA are pledged to observe these standards:
Members must maintain at least two separate bank accounts, one for money due their clients and one for business operating expenses, so that there is no commingling of clients’ and members’ funds. Members shall account faithfully to their clients and deposit funds received on behalf of clients promptly upon receipt, and shall make payment of earnings due clients promptly, including any returned fees, refunded co-agent commissions, or other refunds made on behalf of the client. Members shall use reasonable best efforts to pay clients within ten business days after clearance and attribution but no later than twenty-one days, unless otherwise agreed in writing with the client.
I never studied accounting – I would guess that most agents never did either – but in my apprenticeship under fabled agent Scott Meredith I learned to be fanatically scrupulous in all money matters. Like bank tellers handling great amounts of cash, you have to discipline yourself to think of money as mere entries in a ledger. Once it’s in the bank you can transfer your commission to a separate account. The rest is your authors’ property and must be remitted to them at once. Meredith told me he issued payments to clients the moment a check cleared because he didn’t want to “confuse” their money with his.
Segregating Funds
The prohibition against commingling author and agent funds is critical to sound agenting business practice. If you keep client money and your own commissions in the same account you run the risk of accidentally using client money to pay office expenses (or to buy new radials for your car). After an agent acquaintance suddenly passed away at a very young age, it was discovered that he had kept client and agency money in the same account. What was worse, it was a personal account, not a corporate one. The sorting-out was a protracted and nightmarish tangle involving publishers, authors, heirs and tax authorities. Authors pleaded with their publishers to separate their royalties from their late agent’s commissions but there was no easy legal way to do it and the mess took an ungodly long time to resolve.
It is wise if not imperative for agents to create a distinct tax entity for their business such as a corporation, LLC (Limited Liability company) or DBA (Doing Business As), otherwise the money you collect on behalf of your authors may appear, in the eyes of the Internal Revenue Service, to be personal income.
1099s and All That
A vital fiduciary function is reporting client income to the Internal Revenue Service. As soon as you shake hands with a new client you must obtain their Tax Identification Number (TIN) in order to report annually ((in 1099 forms) to the IRS the payments you issued to your client. Authors must understand that their agent cannot pay them – which virtually means cannot represent them – unless they provide their personal tax ID number or the TIN of their personal corporation. Foreign authors are required to obtain a United States TIN at a US consulate, a process often attended by no small inconvenience.
Many agents accompany 1099 forms with detailed breakdowns of gross revenue and commissions or other expense deductions, in order to expedite authors’ preparation of income tax statements. But it’s a good idea for authors to keep their own records in case there is a discrepancy between their tallies and their agent’s. Remember, a copy of your 1099 is going to the IRS and the writing income you state on it will have to match what you report when you file your taxes.
The Association of American Literary Agents urges member agents to pay their clients within ten business days of receipt of funds. That is certainly an ample time frame, given how long it takes for some checks to clear. However, as the book industry shifts from checks to electronic bank transfers, the time necessary to process author payments has telescoped. Electronic transfers are credited instantly (or almost instantly). Nevertheless, ten days is still a desirable stretch of time, because many agencies process payments only once a week or perhaps every two weeks.
An important duty for agents is vetting publishers’ royalty statements. Many of my colleagues find it an onerous task, and yes it is tedious and time-consuming. It would be less so if books were not sold on consignment, a policy that entitles book stores to return unsold copies to publishers for credit, resulting in maddeningly convoluted royalty reporting, As a result, royalty statements do not tell you how many copies have been sold but rather how many have not been returned, a system I have railed against (in vain) for my entire career.
My heart goes out to those who loathe having to read royalty statements; I’ve been doing it for so long my eye is conditioned to go at once to the key numbers and make sense of them. Like it or not, penetrating their mysteries is vital to track the performance of clients’ books and detect potential underpayments. (Strangely, I’ve never seen an overpayment!)
It’s important for authors to understand proper business practices so that they can be suspicious of unsound, erroneous or fraudulent ones. Although fraudsters have practiced their scams for as long as there have been authors (Cicero complained his publisher was cheating him), I believe the phenomenon has increased dramatically. The shrinking number of viable markets, the closing of publishers’ doors to unsolicited submissions, and the explosive growth of self-published writers have created fertile conditions for pretenders and unscrupulous predators.
If then you are an author discussing representation with a literary agent, you have every right to ask whether their agency is incorporated or at least set up as an LLC or DBA, whether they are members of the AALA or, if they aren’t, whether they subscribe to the fiduciary protocols described in AALA’s Canon of Ethics. Agents should be glad to answer these and other pertinent questions and to reassure you that your money is in good hands.
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Richard Curtis's books on publishing are available at Open Road https://openroadmedia.com/search-results/books/Richard%20Curtis