Retrocession fees, also known as finder’s fees, kickbacks and soft dollars, are commissions paid to a wealth manger or other new money acquirer by a third party – a bank or fund manager, for example.
For example, banks often pay retrocession fees to wealth managers with whom they have partnerships as compensation for choosing them for a wealth management assignment.
Retrocession fees for stock trading assignments typically make up anywhere from 30 to 50 percent of brokerage fees paid by a customer for a stock market transaction.
Banks, for their part, may also receive retrocession fees from third parties like investment funds for the distribution of specific financial products, for example.
If retrocession fees are paid internally, for example from a bank’s investment fund to the wealth management department of the same bank, they are referred to as “internal retrocession fees”.
Retrocession fees are a highly-debated compensation model, because they can result in ulterior motives driving a bank or wealth manager’s decisions to recommend products which are not in their client’s best interest.
Because of this, Swiss federal law dictates that retrocession fees paid out essentially belong to the customer, unless the customer specifically chooses to give them up. The customer only has the opportunity to do this if they are clearly informed about the retrocession fees which they are considering giving up.
However, both retrocession fees and the absence of clear communications by wealth managers to customers in this regard are still widespread.
Retrocession fees typically refer to recurring kickbacks, while a one-off compensation is generally classified as a finder’s fee, referral fee or acquisition commission, depending on the context.
As a norm, a differentiation is made between three types of retrocession fees:
- Retrocession fee in custody banking
Example: A wealth manager brings new customer assets into a custodian bank and receives compensation for doing so. By frequently changing service providers, a wealth manager can generate retrocession fees which benefit them, but not their customer.
- Retrocession fees in trading
These fees are paid out as compensation for various trading transactions (securities trading, for example). The more transactions are made, the higher the retrocession fees paid out (and the higher the brokerage fees which the customer must pay).
- Retrocession fees in financial product purchases
When the term “retrocession fees” is mentioned publicly, it is usually in relation to product commissions. In finance, retrocession fees are often attached to investment funds.
Example: A part of the recurring TER (total expense ratio) which customers must pay goes back to the customer acquirer in the form of retrocession fees. Because the TER is charged to the customer each year, the acquirer receives retrocession fees every year in the form of recurring commissions.