Kickbacks and Retrocessions
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What are Retrocessions?
A retrocession is a type of fee. Typically, kickbacks, commissions, or finders fees are paid to advisors and distribution partners. Fees are generally paid from client funds. Clients are often unaware of these fees. It is still common practice in the financial industry to make retrocessions. Particularly, "independent" insurance advisors receive high commissions when they sell mixed life insurance policies to young people. Structured products and fund sales are still subject to high retrocessions. Having hidden and non-transparent fees can have a negative effect on performance.
Retrocessions: how they work
Usually, retrocession fees are commissions paid by a third party to a financial intermediary/wealth manager. As an example, banks often pay retrocession fees to asset managers who are working with them. It is the bank's goal to pay the managers for bringing in business. It is also possible for banks to receive retrocession fees from third parties for promoting certain financial products, such as mutual funds.
It is widely accepted that retrocession fees are one of the most controversial fee arrangements in the financial sector since money flows back to marketers in exchange for their efforts to generate interest in a particular product. This raises questions regarding the advisor's independence and nepotism. As a result, these fees have some drawbacks, since they provide an incentive to financial advisors to recommend financial products that yield high commissions, rather than advising clients in their best interests. Even though it might seem problematic to recommend a retrocession-tainted investment product, it could be just what the client needs, like reputable mutual funds. Nevertheless, advisors may feel influenced by retrocessions when two roughly comparable products are available, one with compensation and one without.
There is, however, a decline in retrocessions, especially among Swiss asset managers. Many asset managers avoid retrocessions after the Federal Supreme Court ruled several times in leading decisions that they belong to the client as principal rather than to the asset manager who has been tasked with managing the assets. In order for the asset manager to continue to claim retrocessions as a contractor, the client must expressly waive them and understand their amount. As far as cost transparency is concerned, the waiver of retrocessions contributes to avoiding conflicts of interest. A reputable asset/wealth manager should select investments exclusively for the benefit of his or her clients, without regard to any additional earnings, and should avoid retrocessions as much as possible.
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