To Fee or Not to Fee? That’s the Investment Bankers’ Question

Success Fees Are An Integral Part Of An Investment Bank’s Compensation. Here’s Why That’s Worth Reconsidering.

Fiduciary duty is a core tenet of any good wealth manager’s principles. Many founders and owners I speak with pride themselves on not selling mutual funds, having fully open architecture and not selling insurance products. Why? Because they want their clients to believe that their manager is aligned with their best interests. That they are not charging fees or pushing product to generate additional revenue.

Yet, when it comes time to hire an M&A representative, owners often turn to investment banks who receive the majority of their deal compensation in the form of a success fee. The misalignment between client and service provider is stark. In my experience, clients often have a hard time believing that their representative is truly working in their best interest when they are incentivized to close a deal for top dollar.

And how do you convince them otherwise? It is a difficult task, especially as a deal progresses and a client is forced to make hard choices, ostensibly with the help of a trusted advisor.

Success Fees As Deal Closers

The natural argument for a success fee is that the representative will get the deal done quickly for a buyer, and for top dollar for the seller. An easy comparison is a real estate agent – someone who will put a house on the market and negotiate tooth and nail to get the best deal done for the client, all for a small percentage of the sale price. 

Buyer not included.

The difference is that after you sell your house you don’t have to live with the buyer.

Wealth management is a unique beast, in that the only true asset of value is the relationship between the wealth managers and their clients. Top dollar becomes meaningless if your clients or employees run for the hills six months after closing. A deal done quickly with the wrong party is a bad deal, especially if you overpaid to boot.

To that end, paying a success fee might even make sense in other industries – perhaps a manufacturing plant or trucking company cares less about cultural compatibility than a wealth manager.

In Defense Of The Retainer

Of course, the importance of the right price cannot be understated. Volume and deal prices cannot languish due to lack of incentive for those responsible for making deals happen.  However, I think we can agree that the increase in M&A activity over the last few years was not driven by bankers’ sudden need for more success fees.

It is interesting to note that M&A attorneys – the people responsible for the drafting and negotiation of definitive documentation, the people who make sure you are indemnified up the wazoo and don’t end up jobless and drowning in debt – are not paid a success fee for their role in getting a deal done. Nor are the accountants who are responsible for ensuring crucial financial statements are accurate and complete.

Every other M&A service provider is paid quite well to do their jobs (no one plays the violin for their attorney as they wire over money at closing) but none to the extent of the success fee. Yet they still work as diligently and efficiently as possible to bring a deal to completion.

Many investment banks charge a retainer fee – some monthly, some upfront – in addition to a success fee. So perhaps the question is, why isn’t the retainer enough to ensure that a deal is done in a timely and fair manner?

An argument could be that as an investment bank increases in scale it relies more heavily on a success fee to pay for the four- or five-person team working on a deal. But are five people necessary? Perhaps that decision is best left to the client’s preference.

A Final Word On M&A Advisors

Deals can die, too.

An M&A representative has a difficult job and provides an important service. Many deals die on the vine because there is no intermediary to move the process along or provide insight into what are considered “market” terms. They act as advocates for the client and bring valuable industry knowledge to the table.

This is all to say that if done correctly an M&A advisor should act in the same capacity as a fiduciary with a client. As an unbiased support system, incentivized only by the best interest of the client.

Jessica Polito is the Founder and Principal of
Turkey Hill Management, LLC, an M&A consultancy for wealth management firms.

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