Typical asset managers waste GBP6m every five years on poor management of rebate payments

Cash shortfall

A typical asset manager may waste around GBP6 million every five years on rebate overpayments and other inefficiencies, according to cumulative research from Alpha FMC, the asset and wealth management consultancy.

Driven primarily by overpayments, lost flow, and uneconomic commercial terms, Alpha FMC estimates that a typical GBP50 billion asset manager loses around GBP6 million every five years. Of this, Alpha estimates that as much as GBP2.6 million may be paid out unnecessarily through simple overpayments which many firms are unable to claw back. Repeatedly late or incorrect payments to distributors meanwhile can also result in asset managers dropping in distributors’ tierings, ultimately leading to reduced flow and lost revenue. Alpha conservatively estimates that poor rebate servicing quality results in around GBP1.3 million in potential lost fees for typical firms.  

Firms also face costly and time-consuming issues around underpayments, as research also estimates that the average firm will unknowingly fail to pay rebates owed to clients totalling GBP13 million over the same period. This accumulation of underpayments to clients, estimated as being 3.5 per cent of the total rebates bill, needs to be paid back and can negatively impact cash flow and margins when uncovered. 

The ever-increasing complexity of asset management business models and market infrastructure can create myriad commercial, financial, and operational problems. The most frequent issues include:

  • Repeatedly late and incorrect payments to distributors
  • Unidentified underpayments going back several years
  • Investment 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
  • Key person dependencies

Nick Dekker, director of distribution operations at Alpha FMC, says: “In the current climate, defending AUM is more important than ever and asset managers cannot afford a drop in distributor tiering due to poor management of rebates. There is a compelling business case for asset managers who want to get this right, as successful firms may avoid future costs by implementing a scalable operating model that minimises errors and provides robust control over payments. 

“While there is no silver bullet to addressing the issues we have uncovered, one of the root causes of the rebates issue is poor communication between sales, client services, and operations teams, who all need to share the right information at the right time. Managing rebates should never overwhelm 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.  

“The sad reality is that too many firms are likely to see increased delays to clients during this period of remote working, and errors which may go undetected for some time. At Alpha we have developed a rapid assessment tool to help firms understand the size of potential savings, and our clients are finding this useful in developing a business case for change. A great starting point can be this simple rapid assessment together with a ‘health check’ against good practice to inform some pragmatic, targeted next steps.”