Sep 29, 2023

What Are Zombie Rebates And How To Stop Them

Luke Tones
What Are Zombie Rebates And How To Stop Them

Asset managers have woven complex networks with national and regional distribution partners over many years. The lifeblood that sustains these networks is distributor payments, such as trailer fees, retrocessions, commissions, and rebates.

A typical asset manager also unknowingly accumulates ‘zombie’ rebates, i.e. payment liabilities lurking outside of financial accounts due to incorrect calculations. These rebates rise from the dead to hit cash flow and margin, consume management time, ruin reputations, taint relationships, and end careers.

To further complicate matters, institutional clients subscribing directly to funds also seek rebates and concessions that reflect their overall business with a manager, requiring a total view of their client that many managers find complex to accurately calculate every quarter — let alone monthly or ad-hoc before an important client meeting.

Distribution relationships and the commercial agreements that underpin them typically span many years and outlive those who initially agreed. These agreements need updating constantly to reflect new marketing campaigns, changes to regulation, new product launches and fund closures. They are further complicated by mergers and acquisition activity affecting the counter-parties on both sides of the agreement.

Although part of the problem is being regulated away with the advent of clean share classes, managers are obliged to honour legacy agreements, which are incredibly complex and expensive for managers to calculate and control.

The hidden cost of complex distribution networks

The cost of errors is high, and asset managers can save up to $1 million each year if they avoid the effects of zombie rebates. Based on Aiviq’s in-house research, an asset manager with assets under management (AUM) of $50 billion or more with wholesale distribution operations in the UK, EMEA and Latin America incurs $1.2 million each year from overpayments, lost flow, inefficiencies or uneconomic commercial terms — all on top of accumulating zombie rebates.

By the time applicable interest and penalties are added in, these hidden liabilities add up to between $10–15 million over five years for the same $50 billion manager. When a zombie rebate hits (euphemistically described as ‘P&L events’), it is akin to a ‘financial lightning strike’, particularly if identified at a moment that coincides with year-end or earnings calls.

Across the industry, after allowing for regional differences, this adds up to $220 million of avoidable costs across the Top 400 managers. Given an average P/E ratio of 15, the prize for solving this problem is a $3 billion boost in the aggregate market capitalisation for shareholders.

Get in touch with the Aiviq team of skilled and experienced experts if you would like to know more.

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