I realize soft dollars are a ‘rebate’ back from a supplier for using their service. But, how is this any different that simply bribing a a customer to use you as a supplier? Does anyone work in a compliance role and know specifics of soft dollar arrangements? I recall hearing the word tossed around the office at my old employer constantly. We always wanted to pay everything with soft dollars, and new suppliers who prospected us, we ask how much we receive in soft dollars.
I think the basic idea is that the soft dollars must benefit the client not the firm. Also, I will try to reply to your emails later today.
I’m not in compliance, but from reading the CFAI text, the deciding factor is that you’re looking for best value to the client. So if Fidelity is charging 1000, but giving 100 in research (you know that research would be the bomb), and JT Marlon is charging 925, you go with Fidelity (of course).
Thanks Mwvt. I see what you’re saying Jcole, but if that was the case above, why wouldn’t Fidelity just charge $900 with research included? At my prior firm, we paid for factset with soft dollars. We also paid for various trading platforms with it. I’m sure it all benefited the client, but I always wondered why the arrangement existed in the first place.
QuantJock_MBA Wrote: ------------------------------------------------------- > Thanks Mwvt. > > I see what you’re saying Jcole, but if that was > the case above, why wouldn’t Fidelity just charge > $900 with research included? > > At my prior firm, we paid for factset with soft > dollars. We also paid for various trading > platforms with it. I’m sure it all benefited the > client, but I always wondered why the arrangement > existed in the first place. Higher sales with the same net income maybe?
Can you explain by what you mean by rebate back from a supplier? If you soft dollar Factset, you’re doing it through a soft dollar provider (like Goldman). So you would do trades with Goldman to pay your soft dollar bills. For instance if the bill is $10k, and Goldman charges 1cent/comm per share (hard commission), you might do trades through Goldman at R.04 so then 3 cents will go towards your soft balance and 1 cent for hard commission. The other side benefit is that if you do a good amount of soft dollar payments through someone (eg-Goldman) you can also get access to their research/talk to analysts, etc.
A rebate. We literally had a a balance on the chalkboard of the trading room with our current soft dollar ‘balance.’ Any time we were looking at new software, trading platforms, etc, we would push the supplier to accept our soft dollars. I’m not the most familiar with the entire set up, but it really seemed as if soft dollars was a bribe from a provider (ECN trades/custody/etc) to do business with them.
I have always thought it was ridiculous that CFAI is all about ethics, integrity, etc and they look the other way with a progress that is clearly a kickback. Oh right, it benefits the client. How does paying 5 - 10 times in brokerage benefit the client? So they can pay your software costs? Please. Do your own research, pay for the software and tools you need with your own money and get best price and execution from your brokers. That should be end of story.