Retrocessions on fund products create systemic conflicts of interest. An analysis shows how the practice works and why a ban is being debated.
The funds industry relies heavily on retrocessions. Fund companies pay distribution commissions to banks and asset managers — known as trailer fees or kickbacks. These payments come from fund assets, meaning ultimately from investors' money.
The mechanism is simple: a fund company charges an annual management fee (TER — Total Expense Ratio). A portion of this — typically 40 to 60 percent — flows back to the distributing bank or asset manager as a retrocession.
For the investor, this means:
In the EU, the MiFID II directive has significantly tightened transparency requirements. In the UK and the Netherlands, retrocessions to retail investors are completely banned. Switzerland lags behind this development — despite the Federal Supreme Court having clearly ruled in favour of investors.
Kickbacks also played a central role in spreading the Madoff Ponzi scheme. Banks and intermediaries received high commissions for channelling investor funds to Madoff — an incentive that displaced critical due diligence. Lehman Brothers products were mass-placed in investor portfolios for the same reasons.
In 2015, JP Morgan Asset Management had to pay USD 267 million to the SEC because clients were not informed about conflicts of interest and retrocession payments. The SEC found that JP Morgan had favoured its own hedge fund products because they generated higher retrocessions.
The Swiss Federal Supreme Court has clarified in multiple rulings:
Investors who have had an asset management mandate in Switzerland in the past ten years should review whether they have retrocession claims.
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Further reading you may find relevant.
The Financial Institutions Act and Financial Services Act fundamentally change the regulatory landscape for trustees in Switzerland — with direct implications for retrocession obligations.
Inflation-linked bonds promise to preserve purchasing power. Yet between the instrument's real yield and the return that reaches the investor lies a cost layer that is rarely disclosed in full.
From Reuters to Forbes to NZZ: a curated collection of the most important media coverage on retrocessions, kickbacks, and hidden commissions in Swiss finance.
Regulatory notice
This material is for information purposes only and does not constitute investment advice, an offer, or solicitation. It is directed exclusively at qualified investors and is not intended for US persons.
