Retrocession

Retrocession

Retrocession refers to kickbacks, trailer fees or finders fees that asset managers pay to advisers or distributors. A one-off payment is generally called a finder’s fee, referral fee or acquisition commission. There are three types of retrocession fees: 1. **Custody banking retrocession fees** are where a wealth manager receives compensation for attracting a new customer who brings that customer's investment funds into the custody institution. Some consider retrocession fees a dubious compensation model because they can influence a bank or wealth manager’s decision to recommend products that may not be in the best interest of their clients. **Financial product purchase retrocession fees** are part of the recurring total expense ratio (TER), which customers must pay and are typical with investment funds. Retrocession refers to kickbacks, trailer fees or finders fees that asset managers pay to advisers or distributors.

Retrocession fees are kickbacks to wealth managers or other money managers that are provided by a third party.

What Is Retrocession?

Retrocession refers to kickbacks, trailer fees or finders fees that asset managers pay to advisers or distributors. These payments are often done discreetly and are not disclosed to clients, although they use client funds to pay the fees.

Retrocession commission is a heavily criticized fee-sharing arrangement in the financial industry because money flows back to marketers for their efforts in raising interest for a particular product. Therefore, this raises the question of impartiality and favoritism on the part of the advisor. The system would seem to encourage advisors to promote funds or products because they will receive a fee for doing so, not because the products are the best option for the client.

Retrocession fees are kickbacks to wealth managers or other money managers that are provided by a third party.
Retrocession commission is controversial in the financial world because money is going back to marketers for advocating specific products.
Retrocession fees are typically recurring, with one-time kickbacks usually called a finder's fee, referral fee, or acquisition commission.
Types of retrocession fees include custody banking, trading, and financial product purchases.

Understanding Retrocession

Retrocession fees are commissions paid to a wealth manager or other new money manager by a third party. For example, banks often pay retrocession fees to wealth managers who partner with them. The bank will encourage and compensate the managers for bringing business to the bank. Banks may also receive retrocession fees from third parties, such as investment funds, for distributing or promoting specific financial products.

Some consider retrocession fees a dubious compensation model because they can influence a bank or wealth manager’s decision to recommend products that may not be in the best interest of their clients. This suggestion of an investment product where the advisor receives retrocession appears inherently problematic. However, the suggested product is usually suited for the client, as they are mostly high-quality investment products, such as mutual funds. But the issue remains of motivation and agenda, when two roughly equal products are available, one with compensation attached and one without, where some advisors may find themselves unduly influenced.

Types of Retrocession

Retrocession fees typically refer to recurring compensations, as opposed to a one-time deal. A one-off payment is generally called a finder’s fee, referral fee or acquisition commission.

There are three types of retrocession fees:

  1. Custody banking retrocession fees are where a wealth manager receives compensation for attracting a new customer who brings that customer's investment funds into the custody institution. With frequent changes in the service provider association, a wealth manager can generate retrocession fees that benefit them financially but do not necessarily benefit their client.
  2. Trading retrocession fees are compensation for various trading transactions, such as buying and selling securities. The more sales that occur, the higher the retrocession fees become. Because most trades include a brokerage fee for the transaction, which the customer must pay, this again may benefit the money manager.
  3. Financial product purchase retrocession fees are part of the recurring total expense ratio (TER), which customers must pay and are typical with investment funds. These recurring sums flow back to the client acquirer. Because the total expense ratio is charged to the customer each year, the acquirer receives retrocession fees every year as recurring commissions.

Real World Example

In 2015, JP Morgan settled a case with the Securities and Exchange Commission (SEC) for $267 million. The SEC stated that JP Morgan selected third-party hedge funds based on hedge fund managers' willingness to provide fees to a bank affiliate. In these instances, the bank did not inform clients it suggested and preferred the mutual funds willing to share their royalties and instead implied no particular partiality. According to Forbes, the JP Morgan settlement was the first time the term retrocession was introduced to U.S. investors.

Related terms:

Brochure Rule

The brochure rule is a requirement under the Investment Advisers Act of 1940 that requires a written disclosure statement to all clients.  read more

Brokerage Fee

A brokerage fee is a fee charged by a broker to execute transactions or provide specialized services. read more

Commission

A commission, in financial services, is the money charged by an investment advisor for giving advice and making transactions for a client. read more

Fee Structure

A fee structure describes how an entity is to be compensated for levels of service. In asset management, they're often flat or performance driven. read more

Finder's Fee

A finder's fee is a monetary reward paid to a person or entity that introduces a prospective client or customer. read more

Interpositioning

Interpositioning refers to the illegal practice of using an unneeded third party between the customer and the best available market price. read more

Investment Advice

Investment advice is any advice that provides guidance, for a fee, on assets for investment purposes for an individual or institution. read more

Kickback

A kickback is an illegal payment intended as compensation for favorable treatment or other improper services. read more

Mutual Fund

A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities, which is overseen by a professional money manager. read more

Mutual Fund Custodian

A mutual fund custodian is a trust company, bank or similar financial institution responsible for holding and safeguarding the securities owned within a mutual fund.  read more