Retrocession. A large private bank employs relationship managers (RMs) who work with high net

worth individuals. The RMs help their clients to manage their substantial wealth, avoid taxes, and so

forth. When the clients invest in certain funds, the fund owners remit retrocession payments to the

bank as a reward. Consequently, the bank provides its RMs a financial incentive to recommend funds

that provide retrocession. In theory, this need not create a conflict of interest for the RMs, because it

could incentivize them to recommend a fund with retrocession only when there is a choice among

equally attractive investments. It is widely suspected, however, that some RMs bias their recommendations

to favor investments that yield them a higher commission. Is it ethical for the bank to provide this

kind of incentive?