Hello you, Sorry for trouble you with such a simple question. I read ethics code and it mentions about terminology “soft dollars” or “soft commissions” which i don’t understand clearly though i had searched Google and read some article about the way websites explain. Can anyone kindly explain me this terminology by using simple English word phrases and examples of it in case of ethics code, mutual funds and brokerage. Thanks a lot for your help!
Soft Dollars - You pay a brokerage service to execute trades. Many will ‘kick back’ some of the funds as a refund/rebate. This is ok and a common practice. These funds may only be used to help the end client by subscribing to a financial service online, better research, etc. (I could use more help on what soft dollars can actually buy) Soft Dollars may not be used for overhead! The firm may not immediatly benefit from the soft dollar rebate. It is the clients money and therefore must benefit the client.
If I give you 100 dollar in cash, that’s hard dollars. If I give you a fancy dinner instead, that’s soft dollars.
Are you sure about that Dreary?? A fancy dinner would never classify as ‘soft dollars’ simply because it is not used to benefit the client! Soft Dollars are most frequently used to carry out research, and this has nothing to do with it being cash or non-cash!
I am not talking about the Soft Dollars Standard, only the basic definition of soft dollars. For eample, token gifts worth $50 are probably ok, but if a company executive hands you a crisp $50 bill, would that be ok for a token gift? What do the standards say abou that? I don’t know.
Thu Thuy, there’s a document on the CFA Institute website called “CFA Institute Soft Dollar Standards” which may help to clarify things a bit for you.
I guess the executive would think: “This guy is cheap! A couple of McDonald burgers, and he is happy!”:)) Dreary Wrote: ------------------------------------------------------- > I am not talking about the Soft Dollars Standard, > only the basic definition of soft dollars. For > eample, token gifts worth $50 are probably ok, but > if a company executive hands you a crisp $50 bill, > would that be ok for a token gift? What do the > standards say abou that? I don’t know.
Ouch - A fancy dinner is absolutely not soft dollars. If you have an arrangement with a broker to buy you dinner at Nobu every two weeks for your brokerage business, you run all kinds of risk starting with losing your charter. Soft dollars is an arrangement for the broker to pay for something in return for your brokerage commissions. The document above provides tons of guidance but generally research reports, data services, risk management software, Bloomberg terminals, legal consulting, and most any service that directly benefits the safety or return of your client’s portfolio is acceptable.
Yeah Dreary, that really doesn’t sound right. Joey, so for instance just to check my understanding is this correct: Say a comparable broker charges 0.5% to execute trades with no extra services. Your brokerage charges 1.5% to execute trades, but you also receive research reports and general industry outlook reports as part of the deal. The Soft Dollars would be the amount equaling the 1% spread between services. The CFAI would have you break out the soft dollar amount each period to the best of your ability and distribute the costs to the accounts which received the benefits of the services provided by soft dollar expenditures. In other words, if you incurred the 1% spread trading for account Y and used the services to research a great buy for account X, you should attribute the soft dollar charges to account X. Does this all sound correct?
Here’s an example of a softdollar arrangement. At work, although we use many brokers there is one main one we use a lot. We have a soft dollar arrangement with them in that all bloomberg terminal’s are paid for by them (new terminals, monthly payments etc). However it’s only trading dept that have access to the soft dollars so if marketing, for whatever reason, needed a terminal they can’t use the soft dollars to buy one. We can use the dollars to buy other things however as stated above it has to be in the form of services, as apposed to cash. Hope that clear it up.
Swan - That sounds right, but the paragraph starting “The CFAI…” needs to be checked by someone else because I just don’t keep current on CFAI’s soft dollar policies.
Grimer Wrote: ------------------------------------------------------- > Thu Thuy, there’s a document on the CFA Institute > website called “CFA Institute Soft Dollar > Standards” which may help to clarify things a bit > for you. Thanks Grimer for your guide of document source. Thanks everybody for your kindly help. I am reading CFAI Soft Dollars Standard and understood what the word mean. It’s so funny that i though before that “soft dollars” and “hard dollars” had something in common with “soft copy” and “hard copy”. Those are my big problem of language. I still have some confuses need to be explained more detail by Joey and Black Swan at your comment. Joey said “soft dollar is an arrangement” and it is kind of documents. Black Swan took an example of “soft dollars” expressed in amount of 1% spread service. CFAI Standard mentions about third-party research and proprietary research. So i understand 1% amount of spread service belongs to third-party and proprietary research. Is that right? If not, pls help me understand more about one example of third-party research and proprietary research expense in soft dollar arrangement. The word “soft dollar” itself carries two way of understanding depend on case of communication, it can be amount of money in soft dollar transaction and it can be pile of document research in soft dollar transaction? Right? One more question about information disclosure by investment manager at the last page (No.24) of CFAI Soft Dollar Standard. SAMPLE REPORT A CONTENT: 1. Total Dollar Amt of Commissions Generated from Client Account, Detailed by Broker Broker X: $230,000 Broker Y: $650,000 Broker Z: $120,000 Total amount: 1,000,000 2. Total Dollar Amount of Brokerage Directed by Client $267,000 My questions: * Is $1,000,000 Investment manager directed brokerage? Is this $1,000,000 paid for fund by investor? Is this $1,000,000 soft dollar? And does it included all charge of research items in the Sample Report B bellow: * Is client directed brokerage $267,000 investor asset that investor must paid for broker? Is this $267,000 hard dollar? SAMPLE REPORT B: Description of Research Purchased through Soft Dollar Arrangements on a Firmvide Basis, Detailed by Broker Broker A: Access to health care analysis Access to biotech analysis Broker B: Bloomberge services Reuters services Oil industry reports and analysises Broker C: Market analysis of fixed income instruments Thanks all for your precious comments! I think I get seriously problem with terminology, so very need your clear explains. Regards,
I agree - the terminology gets confusing without examples. In “VI. Disclosure”::C.2.a and C.2.b, What is the difference between “commissions generated for that client” and “total amount of brokerage directed by that Client”? According to the definitions below, it looks like Brokerage includes commissions. If so, why is Brokerage less than Commissions in the Sample report 1 quoted by Thu Thuy above? Brokerage refers to the amount on any trade retained by a Broker to be used directly or indirectly as payment for execution services and, when applicable, Research supplied to the Investment Manager or its Client in connection with Soft Dollar Arrangements or for benefits provided to the Client in Client-Directed Brokerage Arrangements. And Commission refers to the amount paid to the Broker in addition to the price of the security and applicable regulatory fees on an Agency Trade.