Retrocessions Endanger Trust — Hidden Commissions and Conflicts of Interest

Anyone wanting clarity on how their bank or asset manager handles retrocessions will find the answer in the general terms and conditions — but they almost always say the same thing: the investor must waive the right to receive hidden commissions.

A widely cited NZZ article by Florian Schubiger, founder of VermögensPartner AG, gets to the core of the problem.

The Scale of Conflicts of Interest#

For equity funds, approximately 0.7% per year of invested capital flows to the asset manager as retrocessions. For structured products or hedge funds, amounts can be significantly higher. Depending on the portfolio composition, retrocessions can easily account for half of an asset manager's income.

The consequence: investors want the best financial instruments at the lowest possible cost. Asset managers, on the other hand, profit from high fees and opaque products. This conflict of interest is further amplified by one-sidedly drafted contracts.

Why the System Works#

Hardly any private investor in Switzerland knows how much their asset manager actually earns. Influenced by sophisticated internal incentive systems, many securities portfolios are filled with expensive investment funds and opaquely structured products.

As long as investors don't demand accountability for commission payments, no major player will voluntarily give up lucrative kickbacks. Asset managers who refuse disclosure are effectively admitting they have something to hide.

What Investors Can Do#

1. Break the silence: Discuss retrocessions with your advisor
2. Demand written assurance: Assert your right to see the exact amount of retrocessions paid at any time
3. Review your claims: Recovery of retrocessions going back ten years is possible — with no personal cost risk through litigation funding

Download the full NZZ article as PDF →

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Source: Florian Schubiger, "Retrozessionen gefährden die Vertrauensbasis", NZZ, May 31, 2010.