What is Retrocession?

What is Retrocession? – It’s the term used to describe the secret payments made by asset managers to advisers or distributors. These payments, which can be kickbacks, trailer fees, or finders fees, are not revealed to clients, even though their funds are used to cover the costs.

The retrocession commission is a fee-sharing arrangement in the financial industry that has faced significant criticism. This is because marketers receive money for their efforts in generating interest for a specific product. As a result, concerns about impartiality and favoritism arise regarding the advisor’s role. The system appears to incentivize advisors to promote funds or products based on the commission they will receive, rather than considering what is truly the best option for the client.

Learn more about Retrocession

It fees refer to commissions given to a wealth manager or another money manager by a third party. For instance, banks frequently pay it fees to wealth managers who collaborate with them. The bank will incentivize and reward the managers for attracting business to the bank. Additionally, banks may receive retrocession fees from third parties, like investment funds, for distributing or endorsing particular financial products.

Retrocession fees are often seen as a questionable way of compensating banks or wealth managers. This can lead to biased recommendations that may not be in the best interest of clients. While the suggested investment product with it may be suitable for clients, there is still a concern about the motivation and agenda of advisors. Especially when there are two similar products available, one with compensation and one without, some advisors may be unduly influenced.

Types of Retrocession

There are three types of it fees:

  • Custody banking retrocession fees
  • Trading retrocession fees
  • Financial product purchase retrocession fees

Example of it

In 2015, JP Morgan reached an agreement with the Securities and Exchange Commission (SEC) and paid $267 million. The SEC claimed that JP Morgan chose third-party hedge funds based on their willingness to pay fees to a bank affiliate. In these cases, the bank did not disclose to clients that it recommended and favored the mutual funds that were willing to share their profits, instead giving the impression of impartiality. According to Forbes, the JP Morgan settlement marked the introduction of the term retrocession to U.S. investors.