Deferred rebate

Deferred rebate refers to a practice in the financial industry where a portion of the commission earned by a broker or intermediary is held back or deferred until certain conditions are met.
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Updated on Jun 7, 2024
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Key Takeaways

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  1. Deferred rebate is a practice where a portion of the commission earned by a broker is withheld until certain conditions, such as performance targets or client retention, are satisfied.
  2. This practice incentivizes brokers to deliver high-quality service, meet performance goals, and retain clients over the long term.
  3. Deferred rebates can benefit both brokers and clients by aligning incentives, promoting loyalty, and enhancing overall service quality and investment outcomes.

What is Deferred Rebate

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Deferred rebate is a compensation arrangement commonly used in the financial industry, particularly in brokerage services, where a portion of the commission earned by a broker or intermediary is not paid out immediately but is instead held back or deferred until certain conditions are met. These conditions may include achieving specific performance targets, such as generating a certain amount of revenue or acquiring a certain number of clients, or retaining clients for a specified period.

Importance of Deferred Rebate

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Deferred rebate arrangements offer several benefits for brokers, clients, and brokerage firms:

  • Incentivizing performance: Deferred rebates incentivize brokers to deliver high-quality service, meet performance targets, and achieve business objectives, as the deferred portion of their compensation is contingent on meeting specific criteria.
  • Promoting client retention: By tying a portion of the broker’s compensation to client retention, deferred rebates encourage brokers to focus on building long-term relationships with clients, providing ongoing support and value-added services to ensure client satisfaction and loyalty.
  • Aligning incentives: Deferred rebates align the interests of brokers, clients, and brokerage firms by linking compensation to desired outcomes, such as revenue generation, client satisfaction, and business growth, fostering a collaborative and mutually beneficial relationship.

How Deferred Rebate Works

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Deferred rebate arrangements typically involve the following steps:

  1. Agreement: Brokers and brokerage firms agree to a compensation structure that includes a deferred rebate component, specifying the conditions under which the rebate will be paid and the amount or percentage of the commission that will be deferred.
  2. Performance evaluation: Brokers’ performance is evaluated based on predefined criteria, such as revenue generation, client acquisition, or client retention, over a specified period.
  3. Rebate calculation: If the broker meets the performance targets or conditions outlined in the agreement, the deferred portion of the commission is calculated and paid out to the broker as a rebate, typically in the form of cash or additional compensation.
  4. Client retention: Brokers may be required to maintain client relationships for a certain period to qualify for the deferred rebate, ensuring that clients remain with the brokerage firm and continue to generate revenue over time.

Examples of Deferred Rebate

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Examples of deferred rebate arrangements include:

  • Brokerage commissions: Brokerage firms may offer deferred rebates to brokers based on their ability to generate revenue or achieve certain sales targets, such as selling a specified number of financial products or services within a given timeframe.
  • Client retention bonuses: Brokers may receive deferred rebates or bonuses for retaining clients and keeping them satisfied over the long term, encouraging them to provide ongoing support and personalized service to their clients.
  • Performance-based incentives: Brokers may be eligible for deferred rebates or incentives based on their performance relative to predefined benchmarks or goals, such as exceeding revenue targets or achieving above-average investment returns for clients.

Real-World Application

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Deferred rebate arrangements are commonly used in the financial industry to incentivize brokers, promote client retention, and drive business growth:

  • Brokerage services: Brokerage firms often use deferred rebates as part of their compensation structure to motivate brokers to achieve performance targets, acquire new clients, and retain existing clients, enhancing the overall quality of service and investment outcomes.
  • Investment advisory services: Investment advisors and financial planners may receive deferred rebates or bonuses for meeting client retention goals, providing comprehensive financial planning services, and delivering superior investment performance over time.
  • Wealth management services: Wealth management firms may offer deferred rebates to their advisors for building and maintaining long-term relationships with high-net-worth clients, ensuring that clients receive personalized advice, portfolio management, and wealth preservation strategies.

Sources & references

Arti

Arti

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Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...