Why Hire a Financial Advisor?
A bond underwriter is not a financial advisor.
Underwriters have no responsibility to serve in the best interest of municipal entities and must make this perfectly clear under the Dodd-Frank Act and in the rules and regulations of the Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB). On written communications with municipal issuers, underwriters must make the following disclosure, in writing:
An underwriter must not recommend that the issuer not retain a municipal advisor.
An underwriter would violate Rule G-17 if it discouraged a state or local government from using a municipal advisor or otherwise implied that hiring an advisor would be redundant because the underwriter can provide the same advisory services.
“Disclosure of Role: The Underwriter is providing the information contained in this document for discussion purposes only in anticipation of serving as underwriter to the Issuer. The primary role of the Underwriter is to purchase securities, for resale to investors, in an arm's-length commercial transaction between the Issuer and the Underwriter, and the Underwriter has financial and other interest that differ from those of the Issuer.The Underwriter is not acting as a municipal, advisor, financial advisor or fiduciary to the Issuer or any other person or entity. The information provided is not intended to be and should not be construed as "advice" within the meaning of Section 15B of the Securities Exchanges Act of 1934. The Issuer should consult with its own financial and/or municipal, legal, accounting, tax and other advisors, as applicable, to the extent it deems appropriate. If the Issuer would like a municipal advisor in this transaction that has legal fiduciary duties to the Issuer, then the Issuer is free to engage a municipal advisor to serve in that capacity.”
Source: MSRB Rule G-17 (emphasis added)
The concern becomes much greater if the underwriter says things like:
"We'll take care of everything."
"There's no reason to hire a municipal advisor."
"We represent your interests."
"Hiring an advisor is just a waste of money."
Those statements can conflict with the required disclosures referenced above that the underwriter is not serving as the issuer's fiduciary advisor.
The SEC and MSRB have repeatedly emphasized that issuers should understand that an underwriter is not their advisor, even when the underwriter provides market information or structural ideas.
The FA should be the first member hired on a municipal finance team.
Financial advisors assist the issuer on matters such as selecting the method of sale (competitive, negotiated, private placement, direct bank loan, etc.), structuring the financing, sale timing, marketing, fairness of pricing, obtaining credit ratings, evaluating cost effectiveness of credit enhancement and other matters.
“Issuers should hire a municipal advisor prior to the undertaking of debt financing unless the issuer has sufficient in-house expertise and access to current bond market information, and issuers should select municipal advisors on the basis of merit using a competitive process and that issuers review those relationships periodically.”