Investment bank fees and elite law firm fees share a trait: altitude. In fact, the British competition agency, the Office of Fair Trading, has started an investigation into investment bank fees for equity underwriting. The Economist, June 19, 2010 at 80, takes a look at the inquiry and offers some ideas about the fee resiliency of brand name firms in the US. Fees are high but not because there is collusion among law firms. Industry profits are too “lumpy” – irregular – for the market to be readily carved up. Nor are their risks taken higher than other firms’.
The explanation, according to the Economist, may lie partly with buyers. With one or two words replaced, this quote hits home: “Heads of big [law departments] have a habit of spending shareholders’ money a bit too freely when they want to [fill in the blank for defend major litigation or complete and acquisition].” That means, for significant legal representations, general counsel often pay over the odds.
Let’s switch another word or two from the article: “Like other professionals, [brand-name law firms] tend not to compete on price lest customers interpret fees as a sign of poor quality.” The need for the prestige firm is rare; the willingness to pay above top dollar if needed is common. Pure and simple, it’s a classic principle-agent problem of freely spending other people’s money in part for your own advantage.