I read about soft dollars in L2 materials but got a little confused as I don’t have any practical experience on brokerage. Usually soft dollars is understood as follows: a portfolio manager executes trades using a broker, paying higher than usual fees. The broker, in turn, gives e.g. research for ‘free’ to the portfolio manager. In this article, however, soft dollars seem to have many other forms than just free research: http://www.sec.gov/news/studies/softdolr.htm For example, an adviser using soft dollars to pay legal expenses, hotel and rental car costs …personal travel, entertainment, limousine, interior design and construction expenses. My question is: is it common that brokers either (a) foot your bills on anything you want as long as you generate brokerage or (b) give you rebates in cash? In CFAI materials it looks like (a) is possible since CFAI recommends that soft dollars can be used e.g. to pay Bloomberg terminal but not electricity in the office. As I said, I don’t have any experience on brokerage but nevertheless, it sounds pretty wild if a reputable broker pays all sorts of bills on behalf of the investment manager. How common is this?
Soft dollars are commission generated from a trade. They are an asset(property) of the client. They can’t be used for any purpose that doesn’t benefit the client. As an investment manager you should obtain best execution, minimize transaction cost, use client brokerage to benefit that client directly, etc…
I doubt that you can use soft dollars to pay for BB terminals. The terminals can be used for anything, not just services to a specific client. Anyway, from my experience with brokers, it’s uncommon for them to pay for your bills. They might, however, buy you gifts, dinner, food, parties, etc.
Well, the CFAI soft dollar standard states (p.12, available on the website): “For example, if the Bloomberg service discussed in the Level III analysis was actually used 50 percent of the time to determine market and industry trends as part of the Investment Manager’s Investment Decision-Making Process, the Investment Manager could pay for 50 percent of the Bloomberg service with Client Brokerage.” I’m still confused…the Investment Manager uses the Broker to have his client’s trades executed and pays brokerage to the Broker, how on earth is it possible for the Investment Manager to “pay for Bloomberg with client brokerage”? Let’s take an example. I buy 1 million shares of X to the client’s portfolio. Broker charges 50 000 in brokerage. Brokerage is charged from the client. The only way I figure it’s possible to pay for a terminal is that I would either get a rebate for myself from the broker or that he would actually pay for the terminal.
shootingstar Wrote: ------------------------------------------------------- > Well, the CFAI soft dollar standard states (p.12, > available on the website): > > “For example, if the Bloomberg service discussed > in the Level III analysis was actually used 50 > percent of the time to determine market and > industry trends as part of the Investment > Manager’s Investment Decision-Making Process, the > Investment Manager could pay for 50 percent of the > Bloomberg service with Client Brokerage.” > > I’m still confused…the Investment Manager uses > the Broker to have his client’s trades executed > and pays brokerage to the Broker, how on earth is > it possible for the Investment Manager to “pay for > Bloomberg with client brokerage”? > > Let’s take an example. I buy 1 million shares of X > to the client’s portfolio. Broker charges 50 000 > in brokerage. Brokerage is charged from the > client. The only way I figure it’s possible to pay > for a terminal is that I would either get a rebate > for myself from the broker or that he would > actually pay for the terminal. Soft Dollars - Broker has a good year due to all of the trading you bring to him. He may try and give you some of his firm’s research/services for free or he may just kick you back a rebate check since you are bringing him a specific level of volume thus creating liquidity. The research/services need to be beneficial to the client for this to be justified ethically. The cash should only be used for client beneficial items (BBerg, research, trading software, etc). The cash cannot be used for overhead or personal items.
Soft dollars can be used for anything that benefits the client. At my firm we use it to purchase specialized research from certain boutique firms that dont have trading desks but also use it to pay guys like Factset as well