I have been reading so much things about Soft Dollars but i have to admit my failure to understand the concept.
In the CFAI book is written that :
“Conflicts arise when an investment manager uses client brokerage to purchase research services that benefit the investment manager.” So the investment manager purchases research from the client or the broker ? and with who’s money ? I thought that it was investment manager that paid brokerage with researches :-S And if the portolio manager pays the fees with researches, so client pays the fees to the portolio manager ? And also in the CFAI book : “Whenever members or candidates use client brokerage to purchase goods or services that do not benefit the client, they should disclose to clients the methods… etc” How can they “use” client brokerage to purchase anything ? For me it is like saying : “i use my current liabilities to buy assets…” no sense. Thanks for support, Coritani.
Suppose that a client of yours needs to make a trade: sell security X, buy security Y. You have a choice of two brokers through which you can execute the trade: Broker A and Broker B. Broker A charges $15 per trade, and all you get is the trade. Broker B charges $20 per trade, but in addition to the trade, they also give you access to their proprietary analysis on securities (including security X and security Y).
The extra $5 you’d pay to broker B is soft dollars: it’s commissions paid not to execute the trade but to receive extra goods/services.
The soft dollar is the payment made by investment managers/funds by either paying extra in commisions or committing to minimum amount of trade with the brokerage in exchange for the proprietary research or services. In oppose to “hard dollar” which is paid directly by the funds, soft dollar is paid indirectly by their clients (because the clients are paying for the brokarage fees).
The access itself is the act of allocating those soft dollar.
Thank for the help. But if i am the client, i would not be very happy to realize that my investment manager used my money to purchase some analysis/researches… I guess a certain amount of soft dollars is reasonable for everyone. But once i read in a mock exam that an investment manager straightfowardly used brokerage commission in order to travel with the brokerage firm… Is it possible ?
Why not? If the analysis/research benefits you, and the price is fair, you’re better off.
That’s the whole idea behind the soft dollar standard: the money must be used to pay for something that benefits the client.
If you’re asking whether that’s permitted under the standard, the answer is, “No.” The manager travelling with the brokerage firm doesn’t benefit the client, so that’s not an appropriate use of soft dollars.