Can anyone explain to me why a soft dollar arragement is bad? Why does the investing public look down on soft dollar arrangements?
They are seen as a potential conflict of interest between the investment manager and its client. The manager is getting a benefit from the broker-dealer (generally, research) for choosing that broker-dealer to effect transactions on the client’s behalf. The client pays the transaction costs to the b/d, which may be higher than others, but the manager gets the benefit.
Here is a law firm article describing the state of play a couple years ago:
But doesn’t the client still pay for the b/d research, even in a default situation? Clients still pay fees to the investment manager, which still pays the b/d for the research information. So, indirectly, the client would still be paying for b/d research in a default situation.