Retrocession

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Retrocession: Definition, Types, Example, and Criticisms

What is retrocession?

Retrocession refers to commissions, kickbacks, trailer fees, or finder’s fees that a third party (for example, a bank or fund) pays to advisers, distributors, or wealth managers in exchange for channeling client assets or promoting certain financial products. These payments are typically funded from client assets and are often recurring. Because they can influence product recommendations, retrocessions raise concerns about conflicts of interest and impartiality.

Key takeaways

  • Retrocession fees are payments from product providers or intermediaries to the advisers or distributors who place client assets with them.
  • They are usually recurring (annual commissions included in a fund’s total expense ratio), whereas one‑time payments are called finder’s, referral, or acquisition fees.
  • Common types include custody banking fees, trading-related fees, and product-purchase commissions built into fund expenses.
  • Critics say retrocessions can bias advisors’ recommendations and create higher costs for clients when disclosure or transparency is lacking.

How retrocession works

A product provider (bank, fund, or platform) compensates an adviser or distributor for bringing client assets or for promoting a particular product. These payments can be:
* Built into product fees that clients pay indirectly (e.g., part of a fund’s total expense ratio);
* Paid to advisers when clients’ assets are held with a custody provider; or
* Tied to trading activity or the volume of transactions that produce commissions.

Because the payments are funded from client assets, they present a potential conflict: an adviser might favor a product that pays a retrocession over an otherwise similar product that does not, even if the latter would be better for the client.

Types of retrocession

  1. Custody banking retrocessions
  2. Compensation to an adviser for directing client assets to a particular custody institution.

  3. Can create incentives to keep client assets with providers that pay higher retrocessions rather than those offering better terms for the client.

  4. Trading retrocessions

  5. Fees tied to trading activity (buying/selling securities) where the adviser or intermediary receives part of transaction-related revenues.

  6. May incentivize excessive trading or the use of more expensive execution routes.

  7. Financial product purchase retrocessions

  8. Recurring commissions included in product charges (for example, within a mutual fund’s total expense ratio).
  9. These fees flow back to the party that acquired the client for the product and are paid annually while the client holds the product.

Real-world example

In 2015, J.P. Morgan settled SEC charges for $267 million related to disclosure failures. Regulators alleged the firm selected third‑party hedge funds partly based on those funds’ willingness to pay fees to a bank affiliate and did not adequately disclose that preference to clients. The case highlighted how retrocession arrangements can be hidden from investors and lead to enforcement action.

Criticisms and client impact

  • Conflict of interest: Retrocessions can compromise adviser independence by creating financial incentives to recommend specific products.
  • Lack of transparency: When clients are not told that their assets fund these payments, they cannot assess whether recommendations are made in their best interest.
  • Additional cost: Fees that are paid to intermediaries ultimately come out of client returns.
  • Potential for biased product selection: Between two similar products, advisers may prefer the one that pays retrocessions.

Mitigation and best practices

  • Full disclosure: Advisers should clearly disclose any commission structures or retrocession arrangements to clients.
  • Fee transparency: Showing clients the explicit cost of products and how adviser compensation is derived helps reduce conflicts.
  • Fiduciary standards: Applying a fiduciary duty (where required) encourages advisers to put client interests first.
  • Consideration of alternatives: Clients and advisers can evaluate no‑load products, fee‑only advisers, or lower‑cost platforms to reduce implicit commissions.
  • Regulatory oversight: Regulators monitor and, where appropriate, enforce disclosure and conduct rules to protect investors.

Conclusion

Retrocession is a form of compensation that can create conflicts between adviser incentives and client interests. While such arrangements are common in the industry, transparency, clear disclosure, and adherence to fiduciary principles help mitigate the risks and enable clients to make informed decisions.