What is Retrocession?

Retrocession is a type of fee which is paid from a third party to a wealth manager, money manager or another party for a certain type of services rendered, such as marketing and asset management. A retrocession fee is essentially a commission which is paid for a successful service made by a marketing agency or a financial advisor. Retrocession fees are usually recurring, but can sometimes be paid one time as a finder’s fee, referral fee or acquisition commission.

Retrocession fees are common practice in the financial industry, and are often used by firms to attract more investors, increase their market share and diversify their asset management offering. They are often seen as controversies in the financial world however, as they are comprised of money that is returned to marketers and advisors who may have advocated specific products. This can create potential conflicts of interest, which can lead to a self-commissioning system, where advisors could potentially be incentivized to promote their own products or services, rather than what would be most beneficial for their clients.

Retrocession fees are a type of incentive for money managers, as they usually come in the form of some kind of a commission, which can help to drive up their revenue and profits. While certain types of retrocession fees are in place to lower the costs for investors, other forms can be used to increase the profits for financial institutions without increasing the costs for investors.

Examples of different types of retrocession fees include custodial banking, trading and financial product purchases. In custodial banking, retrocession fees are charged from a financial institution to another legal entity that is responsible for taking care of the assets they manage. In trading, retrocession fees are charged from a broker to an asset manager in exchange for managing the assets of their clients. Finally, in financial product purchases, retrocession fees are charged from an asset manager to a financial institution when an investor wants to purchase a certain financial product.

Retrocession fees are a controversial topic in the financial world, and can be used in a variety of unethical ways. Although they can be used to incentivize financial advisors to provide more services and better investing advice, they can also be used to encourage the sale of certain products that may not be the best solution for an individual's financial needs. Prior to using a financial advisor or product manager, it is important to research the fees and commissions they may receive from third party sources and ensure that a conflict of interest does not exist.