Why dont IBD fees get competed away like bid-ask spreads?

Why dont IBD fees get competed away like bid-ask spreads?

Surely this should be like any business where competition erodes the profitability, just like say the fees/bid-ask spread on (trading) trading vanilla financial products.

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Comments (12)

Jan 13, 2018 - 12:07am

To add on, when there is so much at stake, people are willing to fork up a little extra to pay for their preferred investment bank. It's much more different than trading, because the trading services offered by various brokers are more or less identical and one of the few ways they can really gain market share is by slashing fees/commissions. Demand is much, much more price elastic in trading vs IB.

Jan 13, 2018 - 2:19pm

What is the appropriate fee compensation? Why do you think its too high?

I think there is a significant amount of competition in IB (not as tough as something commodity related but not oligopolistic either).

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Jan 18, 2018 - 11:42am

An increasing number of capital markets deals are bought, vs underwritten, which results in a situation very similar to what you're describing. The issuer gets its money with no risk and little/nothing in fees, and the bank that buys the securities only makes a meaningful return if it can resell whatever it bought at a higher price.

Jan 20, 2018 - 11:50am

Anyone can trade normal financial products easily. There isn't a qualitative difference in trade execution. However, when you're seeking advisory services, you're paying for a bunch of particularly knowledgable and smart people to take a look at a situation or deal and give you quality advice. There is undeniably a qualitative difference, and there are only a few banks and teams in the world that have the intellectual capital, reputation, industry expertise, and infrastructure to do this for the biggest and best deals. Relationships and experience are also critical here as well; when you hire a sell-side banker, for instance, you're paying for his Rolodex and access to C-suite execs at potential buyers, senior bankers at the banks representing those potential buyers, and his ability to know the market and when/where/how to run the sale process. It doesn't hurt that by hiring someone with those credentials you instantly cover your own ass with the board and other stakeholders. Peace of mind is worth a lot too. Thus, while anyone from Goldman to Raymond James can execute your trade for cut-rate prices, there is a much smaller supply of capable advisory banks.

Senior bankers know this and understand the dynamics and they all collude to make sure fees are kept fairly high and competitive. Thus, the banks can compete on the basis of the perceived quality of their work and still generate a profit.

Jan 20, 2018 - 11:58am

Brokers provide a commodity - it's the same wherever you go. There can be legitimate, strategic differences between how different investment banks will approach selling the same company. A client is willing to pay a premium for one that has a history of running ultra competitive processes, superior strategic positioning, and strong relationships with key buyers, because that can and does generate higher bids. In most sales, a bank that can elicit ~2% higher bids overall has more than paid for itself.

However, there are definitively good arguments to be made for why fees in capital markets are and will continue to erode.

Jan 20, 2018 - 12:35pm

One thing not mentioned in this thread that I think is extremely pertinent is the new MiFID II regulation. As others have mentioned, there is more of a differentiation between the advisory service a bank can offer and executing trades - that being that a "better" bank / group could create much more value and give you better advice on a transaction than a "worse" bank/group, while there is likely very little difference in how your trade is executed bank to bank.

However, the big "differentiator" for deciding which bank to execute a trade with doesn't come with the actual execution of the trade, but rather the access to the research department as a perk of doing business with the bank. While bank A & bank B might give you similar spreads/commission fees, you might decide to execute some trades with bank A even if the prices are worse because by executing your trades with them you now have access to their researchers who could have information you need.

All of this is changing with MiFID II however because banks will no longer be able to offer the research/access to researchers for "Free" when you execute trades with them ... banks are not required to actually charge the money managers for the access to research, partially leading to the degradation of bid-ask spreads because theres now even less of a differentiator between the different banks.

Jan 20, 2018 - 4:23pm
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