Wednesday, September 25, 2013

Placement Agents Are Mostly Useless

I was flipping through the marketing brochures of a corporate law firm when a fancy-sounding term caught my eye:  "placement agent."  What's that, I wondered?  Is it like some kind of sports agent running around yelling "show me the money" like in Jerry Maguire?  My impression was actually pretty close.  A placement agent is literally some private party who finds investments for investors.  The more I read about this unique function in the finance sector, the more it seems like a total waste of money for investors and a liability for fiduciaries.

Legitimate placement agents should have no permanent financial relationship with either party they introduce and should play no role in negotiating a deal or in subsequent operations.  I just think that's obvious but not everyone in finance thinks like me.  Greedy people will have a hard time living that philosophy.  Some placement agents get sued and imprisoned for the damage they do to clients.

Placement agents can cause breaches of trust for fiduciaries and conflicts of interest for money managers.  They may have a limited role to play by introducing two separate private parties but they can cause innumerable problems for retirement plan sponsors, endowments, and other fiduciaries who are subject to strict legal controls.  Most of these agents are probably an unnecessary middle-person in the allocation of capital.  They are quite different from business brokers who perform a needed function for privately held businesses seeking liquidation.  Alfidi Capital is not a place for unethical placement agents.