#55 Kickbacks: Where fund owners lose returns

Imagine you buy a fund or a structured product through your bank. The issuer of this product naturally wants to sell as many of its products as possible. To boost sales, it pays the bank a commission for each share sold. Alternatively, it may be a recurring portfolio management fee.

The problem with this is that these payments create conflicts of interest. They make objective, independent advice practically impossible. Your bank has an incentive to put the funds in your portfolio that earn it the most money – and not necessarily those that are best for you. Ultimately, you bear the costs, as these brokerage commissions are indirectly financed through the fund fees.

Hidden costs in funds

There are various types of retrocessions. With so-called portfolio management commissions, part of the management fees charged by a fund goes to the bank that holds the fund for you in your securities account. On average, this amounts to around half of the fund fee – which can reduce your annual return by almost one percentage point.

In addition, so-called front-end loads are still common. Anyone who buys a fund can expect to be charged up to five percent of the amount invested. This fee is also shared between the bank and the issuer. In some cases, redemption fees – known as backloads – are also added. When a fund unit is sold, the bank deducts another one to three percent. These mechanisms mean that many investors remain in poor funds in order to avoid further losses.

Legal developments

The Swiss judiciary has been dealing with the legality of retrocessions for over twenty years. Back in 2006, the Federal Supreme Court ruled that asset managers are obliged to disclose such payments. This obligation is essentially already enshrined in the Swiss Code of Obligations: anyone acting on behalf of a client must inform their clients about the management of their affairs at all times and reimburse them for everything they receive from third parties.

For a long time, however, it was unclear how transparent banks actually had to be in providing information. Many financial institutions only issued vague percentages or even had clients sign waivers. The Federal Supreme Court later clarified that such a waiver is only valid if the client knows exactly how much is being waived.

There was also disagreement for a long time about the statute of limitations. Banks invoked a five-year period for recurring payments, while the Federal Supreme Court generally assumed a ten-year period. In addition, some banks charged high fees for disclosing the amounts – so high that many of those affected gave up.

Since 2020, the Financial Services Act (FIDLEG) has provided clarity in this area. It obliges banks to provide this information free of charge, thereby significantly strengthening the rights of investors.

Misguided incentives in product selection

Retrocessions are not only costly, they also distort the incentive structure in the investment business. They can lead banks and asset managers to recommend products that generate higher commissions – instead of those that promise the best long-term returns for you. In doing so, they influence not only the selection of individual funds, but also, under certain circumstances, the overall strategic asset allocation.

At True Wealth, we therefore rely exclusively on ETFs and index funds that are best suited to our clients. We do not accept retrocessions and do not use proprietary products – this ensures that your interests are our top priority.

Have you ever tried to reclaim retrocessions from your bank? And what was your experience? Send me an email about your experiences.