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

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.

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.

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

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.