The financial advisor industry has expanded its share of bond deals advised over the last 13 years. Simultaneously, the top-10 firms’ share of the FA business has gone up and down and up again, but in the long term seems generally to be increasing.
In 1999, 57.2% of all bond issues by par value had a financial advisor involved. That number had risen to 75.5% of all issues in 2011.
Several industry observers said the bond market’s increased volatility since 1999 has led more issuers to hire FAs. Volatility accompanied the 2008 economic downturn and 2008 was the start of the most recent jump in FA use.
Those observers, along with Howard Cure, director of muni research at Evercore, said the increasing complexity of bond issues led to greater use of FAs. After the start of the recent economic downturn, FAs were employed to unwind certain swaps, Cure noted.
“Over the past 10 to 12 years as financing structures have become more complex, having a financial advisor has become more important,” said Bart Mosley, co-president of Trident Municipal Research.
The Government Finance Officers Association has supported the use of FAs, according to Jon Bronson, managing director of Zion’s Bank public finance, and Steve Apfelbacher, president of Ehlers & Associates. Bond issuers are responding to the message, they said.
The Dodd-Frank law also effectively communicates the importance of having a financial advisor, Apfelbacher said.
Colette Irwin-Knott, president of the National Association of Independent Public Finance Advisors, said the fiscal challenges of local governmental entities have pushed them to hire FAs.
Thomson Reuters data also shows that from 1999 to 2011 top-10 FA firms’ market share went up, down and up again. However, at the end of the period the share seems to have stabilized at a higher level than where it started.
Jack Addams, head of public finance at First Southwest, Leticia Davis, principal at Peralta Garcia Solutions LLC, and Dave Thompson, chief executive officer of Phoenix Advisors LLC, explained that the market share shifts by pointing to the number of big deals being issued. Periods of big deals coming to the market led to the top-10 FA firms taking larger shares of the FA business. They said big firms will generally be hired to advise the big deals.
Thompson gave the example of his own firm in New Jersey. Last year there were few big deals in the state and his firm was the number-one advisor in par value and number of issues advised. In some recent years that had big bond issues, his firm was not even in the top five for par value because the big issuers turned to large national or out-of-state FAs, he said.
An increase in complexity of bond issues in 2002 and 2008 led many issuers to hire the biggest FAs in those years, said Michael Decker, co-head of municipal securities at Securities Industry and Financial Markets Association.
In 2002 there was a boom in relatively complex issuance like swaps and variable-rate demand notes. During the 2008 financial crisis, issuers had to turn to FAs to restructure outstanding deals that were not performing as intended. In both periods, issuers may have turned to larger FA firms due to their perceived greater knowledge to handle complex matters.
Over the long run there has been an overriding trend towards greater concentration in the top 10 firms, Addams said. There have been an increasing number of big deals and they require big FAs, he explained. Also issuers increasingly realize that the biggest FAs have resources across several disciplines, allowing them to provide the best advice, he said.
Yet the FA industry remains significantly less concentrated than the bond underwriting industry. In the 1999 to 2011 period, the top-10 underwriting firms handled between 61% and 77% of the business each year, by par value. By comparison, in the same period the top-10 FA firms took between 42% and 64% of the bond issues that had a financial advisor.
There is simply a larger number of small FA firms, which reduces the industry’s concentration, explained Addams, Decker and Chris Payne, managing director at Ponder & Co. Unlike underwriters, FAs aren’t required to hold capital, Addams said, allowing smaller ones to thrive.
“There has been to some extent a trade-off among investment banks between capturing underwriting business and capturing advisor business, so as there was consolidation on the underwriting side with the top underwriters gathering more market share, the smaller banks and regional firms pursued more advisory business,” Mosley said. “This probably eroded the top financial advisors’ market share somewhat.”
Irwin-Knott said the FA’s closer relationship to state and local issues is key to understanding the FA industry’s lesser concentration. “Underwriting is fairly transferable, homogenous throughout the country,” she said. “Financial advisory is much more tailored to the local government and the states.” It is more challenging to consolidate the FA’s services.
The relationship with an FA is more intimate, said Noreen White, co-president of Acacia Financial Group. Many times an FA staff member has to be at a meeting with the issuer. That is easier for a small FA that is nearby than for a national FA that may not have a local presence.
Dodd-Frank required municipal advisors, for the first time, to register with the Securities and Exchange Commission and Municipal Securities Rulemaking Board, and to be subject to regulatory oversight by those agencies. The law defined municipal advisors to include financial advisors, guaranteed investment contract brokers, solicitors, finders, third-party marketers and placement agents.
Until Dodd-Frank, the FA industry was unregulated, Decker said, which may have allowed greater dispersal. The introduction of regulation may lead to a greater concentration, he said.
Robert Slavin writes for The Bond Buyer.