Retrocession
Updated on July 18, 2023
Retrocessions refer to the practice of portfolio managers paying trailer fees, kickbacks, or finders fees to distributors or advisers without the knowledge of investors. These payments are deducted from the invested amount.
Retrocessions have been criticized as a fee-sharing arrangement in the financial industry, as funds flow back to marketers for promoting specific products. This raises concerns about the ethicality of advisers and whether they provide impartial advice.
This type of fee-sharing arrangement incentivizes advisers to promote funds or financial products in order to receive fees. Advisers may prioritize their own financial gain over assessing the suitability of the product for their clients, leading them to push for investments without impartial analysis.
Examples of Retrocession
Retrocession refers to a commission or fee that is paid to an advisor or wealth manager for their role in bringing in new investors.
For example, banks often pay retrocession fees to portfolio advisors who collaborate with them. These banks, in turn, receive compensation from the advisor for facilitating business opportunities. Additionally, banks may also receive retrocession fees from third-party entities like mutual funds for promoting and distributing specific investment products.
What are the demerits of retrocession
Lack of Transparency: Retrocession fees are often not disclosed to investors, creating a lack of transparency. Investors may be unaware that a portion of their investment is being used to compensate advisors, which can lead to questions about conflicts of interest and impartiality.
Potential for Biased Advice: The payment of retrocession fees can create a conflict of interest for advisors. They may be incentivized to recommend investment products that offer higher fees rather than those that are truly in the best interest of the investor.
Higher Costs for Investors: Retrocession fees increase the overall costs of investing for individuals. These fees are deducted from the invested amount, potentially reducing the returns and increasing the expenses borne by investors.
Ethical Concerns: Retrocession arrangements have raised ethical concerns within the financial industry. Critics argue that such fee-sharing practices may compromise the integrity and independence of advisors, leading to potential mis-selling or biased advice.
