Rebates: Getting it Right. On Time. Every Time.

Nick Dekker, Harry Taylor

Rebates and commissions are commonplace in the asset management industry, but many firms find them costly, complex, and time-consuming to manage. With distributors now ranking managers on rebate servicing quality, the cost of errors is high.

Alpha’s research estimates that over a five-year period, a typical £50bn asset manager with a wholesale distribution footprint in the UK, EMEA and Latin America, wastes £6m because of poor rebate management. This arises primarily from overpayments, lost flow, inefficiencies and uneconomic commercial terms.

In our experience, the typical asset manager also unknowingly accumulates rebates debts totalling £13m over the same period. These underpayments will need to be paid out when discovered, together with any applicable interest and penalties. This negatively impacts cash flow and margin, and can cause issues if identified around financial reporting deadlines and earnings calls.

Source: Alpha Research, 2020. Figures based on Alpha project experience and industry observations relating to rebates management with multiple asset managers.

Rebates give flexibility, but suffer from complexity

Rebates are a handy tool in the commercial kit bag of Sales teams: they give flexibility and granularity in fee arrangements without needing to create new share classes. In an increasingly competitive and commoditised market, constructing a good deal for distributors and end investors is key to access capital and grow assets.

However, if you are an asset manager, over time your book of relationships can become harder to manage. Your business expands and new distributors are onboarded. Processes are outsourced. Funds launch and merge, investor holdings move, and client organisations change. Market practices shift around intermediaries, nominees, and custodians, while regulatory expectations keep increasing.

You're late, they wait, and now you backdate

These changes result in complexity which is hard to govern, and result in a raft of commercial, financial, and operational problems. Here are the top three issues we have found in our analysis and experience, and their impact over a five-year period for a typical asset manager.

  1. Unidentified underpayments going back several years: £13.1m owed to distributors which asset managers must pay out when identified
  2. Overpayments to distributors: £2.6m paid out unnecessarily which asset managers are unlikely to attempt to claw back
  3. Lost revenue due to poor rebate servicing quality, for example repeatedly late and incorrect payments to distributors: £1.3m conservative estimate of potential fees asset managers are losing

In addition, these are some other issues we frequently see at asset managers with a distribution footprint in UK, EMEA or Latin America – do they sound familiar to you?

  • Investments flows in unidentified accounts
  • Difficulty validating client invoices
  • Overly complex and sometimes uneconomic rebate terms
  • Manual processes and lack of technology automation tying up resources
  • Uncertainty over the latest versions of agreements and amendments
  • Confusions over terminology across the organisation
  • Key person dependencies

In a cost-conscious environment our clients are asking us three questions:

  1. What’s the right model for managing rebates?
  2. What are some things we can improve now with the tools we have?
  3. How do we ensure our current book is correct and we reduce the errors?

How do you Solve a Problem like Rebates?

The business case for getting this right is compelling. Future costs can be avoided with a scalable operating model that minimises errors and provides robust control over both internal and outsourced payments.

There is no silver bullet but some key solution elements we see industry leaders adopting are:

  • Clear ownership and governance including standard terminology
  • Workflow and automation across simplified processes
  • Mechanised capture of obligations during client onboarding
  • Enterprise level data-modelling that ties together commercial and operational client data including agreements
  • Ongoing reconciliations with fund and client account master data
  • Alignment with other account management processes such as flow attribution

Managing rebates should not overburden Sales and Client Support teams. Good practice is to implement solutions that slot into the wider commercial processes of engaging and contracting with clients, and codifying and validating data entry, with workflow to avoid errors and minimise ‘non-standard’ structures.

Alpha has built a solution framework, target roadmap, and a collection of accelerators to help firms solve an issue which they have struggled for years to solve internally. Additionally, Alpha has developed a rapid assessment tool to help firms understand the size of potential savings, and our clients are finding this useful in articulating a business case for change.


What do you do next?

The starting point can be as simple as a rapid savings assessment, together with a ‘health check’ against good practice to inform some pragmatic, targeted next steps.

If you would be interested in speaking with our specialists in this area, please do not hesitate to get in touch with us using the contact details below.

About the Authors

Nick Dekker

Nick Dekker is a Director and leads the Distribution Operations proposition in the UK. He has over 11 years’ experience, and specialises in helping firms to improve their management of rebates, obligations, legal agreements, and operational data. Nick previously worked at KPMG within their Asset Management Consulting team, focusing on efficiency savings and risk reduction in Distribution and Operations functions. He also spent six months as Interim Head of Risk at a £100bn+ UK asset manager.

Harry Taylor
Senior Manager

Harry is a Senior Manager and has been a consultant in the financial services industry for seven years. Harry works in Alpha’s Distribution practice and specialises in data programmes considering how data can be used to make sales and marketing more effective, to manage risk, and to make business processes more efficient. Recently Harry has supported clients with rebates governance and architecture design, ESG data requirements for client reporting, and establishing client data analytics functions in Distribution.