A relatively recent accounting standard—ASC 606—has had a significant impact on how investment bankers recognize revenue for advisory fees. Whether or not an investment banker operates under a broker-dealer, proper revenue recognition is critical. But for those working through a broker-dealer, it’s more than just accounting—it directly affects the firm’s ability to pay out those fees without impairing the firms net capital.
Under ASC 606, advisory fees such as retainers, work fees, and other non-contingent payments may only be recognized as revenue when received if certain conditions are clearly met. These conditions must be reflected in the language of the engagement letter. Specifically, the agreement must state that the advisory fee is:
Non-refundable
Earned upon receipt, and
Paid in exchange for specific services that are separate and distinct from any contingent compensation (such as a success fee).
If these elements are missing or unclear, the fee may need to be recorded as a liability until a triggering event—like a closing—occurs, regardless of the amount of work already completed. This delay can create regulatory challenges and complicate payout timing.
Avoid vague or conditional phrasing that ties payment to a transaction closing or implies refundability. Instead, use clear, ASC 606-compliant language to ensure your fees are recognized appropriately.
When in doubt, consult with your CPA or broker-dealer’s finance team to ensure compliance with ASC 606.
