Soft Dollar -- big picture question

Is the soft dollar stuff always through the eyes of an investment manager? like, should we always imagine we are the investment manager getting soft dollars from our clients by doing trades with various brokers? or is it ever through the brokers eyes?

Soft dollars come from brokers, not clients. Do you mean is it ethical for brokers to enter into soft dollar arrangements? I think it’s always ethical to give someone else money as long as you’re not asking them to something unethical in return.

the soft dollars come from clients paying more to brokers than needed for the transaction, right? and then the soft dollars go back to the investment manager?

Soft dollar arrangements are usually worked out without the clients knowing anything about it. They are not involved in the transaction and you may or may not disclose the arrangement to them. But since commissions are usually paid directly from client accounts, they are absolutely paying for the soft dollar arrangement. In fact, if your clients pay you a wrap fee (a fixed fee of say 50bp/year from which you have to pay all commissions to give you some incentive not to churn the account), there is probably no issue at all in soft dollar arrangements because they just cost you money. Most soft dollar arrangements I have seen involve the broker paying for something billed regularly, e.g., risk management software monthly fees, or Bloomberg fees, etc…

so money goes from investor to money manager to broker (via securities transactions) and then broker pays some back to money manager in the form of bloomberg fees/research?

Right (although the Bloomberg thing was just an example, of course).

soft $ are benefits of any kind which are obtained from broker for using that broker’s services,

Yep, if you get the concept it makes sense if you read the CFA reading. I didn’t find the questions particularly difficult.

Schweser, study session 1, reading 3: “…For example, a computer work station may be classified as a qualifying product, but the electricity ot run the equipment would not.” Who pays for the electricity and with what means? Can someone elaborate on this?

it means that you can use soft dollars to pay for the computer but not for the electricity. the firm has to pay their own utility bills no matter what

What is the primary use of the workstation and electricity? If the primary usage of workstation is to make investment decision, then that product can be paid using softdollars (indirectly by the client). If the primary usage of electricity is to run the investment manager’s offices (airconditioning, etc), then that cannot be paid using softdollars. The investment manager needs to pay for it.

I’ve never heard of anyone paying their electrical bill with soft dollars. The big problem would be that you would have to tell the person giving you the soft dollars that you are using it to pay utilities bills and you would get laughed at.