The trail a manager pays a private bank is a share of the management fee, so it follows the client's NAV, and the manager's real margin is what is left.
A retrocession is a share of the management fee that the manager pays back to the distributor, so it is calculated on the same base as the fee: the client's NAV, day by day or quarter by quarter, never the amount first subscribed. On an illustrative 50,000,000 raised through a private bank, a 1.25 per cent fee and a 40 per cent retrocession pay the bank 0.50 per cent of NAV a year, 1,451,551 over five years, and leave the manager a net margin of 0.75 per cent.
Worked in full in The Private Wealth Fundraiser by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Retrocessions are the price of shelf space in the wealth channel. A private bank or wealth manager that places a fund with its clients is paid in two ways: an upfront subscription fee charged to the client, which never passes through the manager, and a trail, which is the retrocession of part of the management fee for as long as the client stays invested. The manager negotiates the second one, books it as a cost, and should know to the euro what it will be. The arithmetic is simple. Getting the base right is where most budgets go wrong.
| Input | Value |
|---|---|
| Raised from the bank's clients at launch | 50,000,000 |
| Management fee, on NAV | 1.25% |
| Retrocession, share of the management fee | 40% |
| NAV growth, net of all fees, no flows | 6.0% a year |
| Upfront fee charged by the bank to the client | 2.0% |
| Horizon | 5 years |
Management fee for the period = average NAV × fee rate × period fraction
Retrocession = management fee × retrocession share
Manager's net margin = fee rate × (1 − retrocession share)
In bps of NAV: 1.25% × 40% = 50 bps to the bank, 75 bps kept. In Excel, with the average NAV of each period in column B: =B2*$F$1*$F$2, where F1 holds the fee rate and F2 the share. Use the actual NAV on each valuation date, and the actual days in the period, when you settle with the distributor.
| Year | Average NAV | Management fee | Retrocession to the bank | Kept by the manager |
|---|---|---|---|---|
| 1 | 51,500,000 | 643,750 | 257,500 | 386,250 |
| 2 | 54,590,000 | 682,375 | 272,950 | 409,425 |
| 3 | 57,865,400 | 723,318 | 289,327 | 433,990 |
| 4 | 61,337,324 | 766,717 | 306,687 | 460,030 |
| 5 | 65,017,563 | 812,720 | 325,088 | 487,632 |
| Total | 3,628,879 | 1,451,551 | 2,177,327 |
Over five years the bank receives 1,451,551 of retrocessions, and the manager keeps 2,177,327 of a 3,628,879 fee. Add the 1,000,000 upfront fee the bank charged its clients at subscription and the distributor's total income from the placement is 2,451,551, or 4.90 per cent of the amount raised. That is the figure the bank's product committee looks at, and it explains why a fund with a trail is easier to place than one without.
For the manager, the useful number is the net margin: 75 basis points on every euro this channel brings, against 125 on a euro that arrives from an institution with no intermediary. Every forecast of the wealth business, every break-even and every share class decision should start from that figure, not from the headline fee.
The trail is paid on the client's holding, so it moves with performance and with redemptions. A client who redeems stops generating retrocessions on the day the units are cancelled; a fund that gains 6 per cent a year pays the bank 26.2 per cent more in year 5 than in year 1, without a single new subscription.
| Retrocession share | To the bank, bps of NAV | Manager's margin, bps | Retrocessions, 5 years | Kept by the manager, 5 years |
|---|---|---|---|---|
| 30% | 37.5 | 87.5 | 1,088,664 | 2,540,215 |
| 40% | 50.0 | 75.0 | 1,451,551 | 2,177,327 |
| 50% | 62.5 | 62.5 | 1,814,439 | 1,814,439 |
| 60% | 75.0 | 50.0 | 2,177,327 | 1,451,551 |
Each ten points of share moves 12.5 basis points of NAV between the two parties. At 60 per cent, the distributor earns more from the fund than the manager does; that happens in practice for small managers seeking their first private bank shelf, and it should be priced as a customer acquisition cost, not as a fee concession.
Distributors also compare the trail with the upfront fee they could have charged instead. Discounted at an illustrative 8 per cent, the trail on this placement is worth:
| Client stays invested | Trail received | Present value | As % of amount raised |
|---|---|---|---|
| 2 years | 530,450 | 472,437 | 0.94% |
| 3 years | 819,777 | 702,114 | 1.40% |
| 5 years | 1,451,551 | 1,148,787 | 2.30% |
| 7 years | 2,161,413 | 1,579,070 | 3.16% |
A client who stays five years is worth more to the bank through the trail than through the 2.0 per cent upfront fee. A client who leaves within three is not. That is why distributors with short client holding periods push for upfront fees, and why a semi-liquid fund's redemption terms are a distribution question as much as a liquidity one.
Budgeting the retrocession on the amount raised. At 50,000,000 × 1.25% × 40% the bank costs 250,000 a year, 1,250,000 over five years. The real figure is 1,451,551: the flat estimate is 201,551 short, 13.9 per cent of the true cost, and the gap widens every year the fund performs. The opposite error is just as common: a budget that ignores redemptions overstates the trail on a book that is shrinking.
Calculate the retrocession as the management fee on the distributor's clients' average NAV, times the agreed share: here 0.50 per cent a year, 1,451,551 over five years, with 0.75 per cent left for the manager. Plan the wealth business on the net margin, not the headline fee. The full fee stack the client pays is worked in how much of a semi-liquid fund's return the fees take, and the free workbook for this case turns flows into the assets these fees are charged on.
It is negotiated, and levels vary by market and distributor. The arithmetic is the same at any level: each ten points of share moves 12.5 basis points of NAV on a 1.25 per cent fee. In the illustrative case, a 40 per cent share pays the distributor 50 basis points a year and leaves the manager 75; at 60 per cent the distributor earns more than the manager.
Only if the client stays long enough. Discounted at an illustrative 8 per cent, a 0.50 per cent trail on a fund growing 6 per cent a year is worth 1.40 per cent of the amount raised after three years and 2.30 per cent after five, against a 2.0 per cent upfront fee. Short holding periods favour the upfront fee.
Usually not. Distribution agreements normally share the management fee only, calculated on the average NAV held by the distributor's clients over the period. On 50,000,000 raised at a 1.25 per cent fee and a 40 per cent share, that is 257,500 in the first year, 5,150 per 1,000,000 held.
This article is one calculation from The Private Wealth Fundraiser. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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