Definition of retrocessions
Retrocessions are a type of fee. The term refers to kickbacks, commissions or finders fees paid to advisors or sales partners. These payments are often made discreetly and are usually not disclosed to clients, although client funds are ultimately used to pay the fees. Retrocessions are still commonplace in the financial sector. So-called independent insurance advisors, in particular, earn high commissions when they sell, for example, mixed life insurance policies to young people. High retrocessions are also still paid for structured products or the sale of funds. This can have a negative impact on performance, as these hidden and non-transparent fees have to be paid somehow.
How retrocessions work
Retrocession fees are commissions paid to a financial intermediary by a third party. For example, banks often pay retrocession fees to asset managers who work with them. The bank encourages and compensates 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 certain financial products.
Some consider retrocession fees to be a dubious remuneration model because they can influence the decision to recommend products that may not be in the best interests of their clients. Recommending an investment product where the advisor receives a retrocession seems problematic per se. However, the proposed product may well be suitable for the client, as is the case with reputable investment funds, for example. However, the question of motivation and agenda remains when two products of approximately equal value are available, one with and one without compensation, where some advisors may feel influenced by the retrocession.
Retrocession commissions are a highly criticized fee arrangement in the financial industry because money flows back to marketers for their efforts to generate interest in a particular product. This therefore raises the question of independence and nepotism on the part of the advisor. Such fees are therefore not unproblematic as they give the financial advisor an incentive to recommend financial products that generate high commissions rather than being concerned to advise in the best interests of the client. Retrocessions are, however, on the retreat, particularly among asset managers in Switzerland. After the Federal Supreme Court repeatedly stated in leading decisions that such retrocessions belong to the client as the principal and not to the asset manager who was commissioned to manage the assets, many asset managers have decided to forego retrocessions. The client as principal would have to expressly waive the retrocessions and also be aware of their amount so that the asset manager can continue to claim them as the contractor. In terms of cost transparency, the waiver of retrocessions is welcome and helps to avoid conflicts of interest. Reputable asset managers should select investments exclusively in the interests of their clients, without taking into account any additional income, and therefore waive retrocessions wherever possible.