Retainers Change Incentives of Advisors

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Retainers Change Incentives – Summary

  • Advisors on retainer take the more speculative clients
  • Advisory firms on retainer delegate to junior staff members
  • Success fee-only advisors work with highly marketable businesses

Retained Advisors Swing for the Fences

An advisor who requires a retainer can engage with less committed clients because he gets paid either way. Speculative clients include businesses with a minimal market appeal or those that are dramatically overpriced. If you want to swing for the fences and don’t mind potentially being out of pocket $100k-$150k, then these engagements offer poor odds at winning a sizeable lottery ticket. The numbers bear this out in the lower middle market.  Typical retainer-driven engagements result in a closed transaction about 20% of the time, an example of advisor incentives being impacted.

Who Works the Sale?

The Reality of a Team-Based Approach

Larger retainer-driven firms typically market themselves as having a team-based approach. The reality is that the firm’s size in the lower middle market doesn’t make much difference. Each opportunity is so unique, and the details are so specific that it is almost impossible to be conversant in more than 2-3 deals at one time. Your attention is spread a mile wide and an inch deep in a team-based environment. The company-specific knowledge and responsiveness required to move a prospect from general interest to a committed buyer aren’t possible while working 10, 20, or 30 different opportunities.

Retainers Pay the Junior Staff

Since the success fees are shared with everyone who touches the deal, why share a lucrative commission on an opportunity with a high probability of closing?  

Partners typically delegate the less attractive clients to a junior staff member. The junior staff member will work the low probability, retainer-driven opportunities because the partners have kept the best engagements for themselves. The junior staff member earns the firm a guaranteed profit by managing five or more simultaneous opportunities even without closing a single transaction.

Fee-Only Benefits

On the other hand, a successful fee-only advisor needs to be sure the business will be attractive to the types of buyers he already knows how to attract. He bears much of the risk for a failed transaction by not accepting a retainer. The lack of a retainer forces the advisor to be realistic in evaluating new opportunities and will push the advisor to allocate their time and attention accordingly, boosting the advisor’s incentives. Unlike advisors who charge retainers and, on average, close only 20% of their opportunities, a typical no-retainer advisor typically will close over 75% of their deals.