Soft Dollars

CFA Level II
#1

I always get confused with this, does soft $ mean actual commisisons paid by clients? Or is it client’s potential business? Why would you need to disclose to your client that you bot a computer or bloomberg with the cash they gave you as commission? Would you need to tell your client how you spend all of their commission? How can a client tell you how to spend their commissions? is that directed brokerage? Thanks for any clarity in advance.

#2

bump

#3

you are managing your clients money. you pay brokerage fees on their behalf and in return get some perks (soft dollars). those perks should benefit your clients because they are the ones actually paying the fees (not to you but to the brokers through you). fees that you receive from clients are different from soft dollars. it’s up to you how you spend your own money.

#4

a few questions/comments from me they also seem to bring in what i’d call normal commissions. i.e. you like a utilities analyst from XYZ brokerage firm. you should be paying for that person from commish from all accounts that benefit from research. is it ok to pay higher commish than best execution because you like an analyst?? i think so. and they made a distinction in one question between internal and external commissions. i had no idea what they were talking about… my wording could be wrong. i’ll try to post exact wording later.

#5

It is sort of a kickback account from the broker to money manager. Say I am a money manager and you are my client; I charge you a flat 1% of your account value as my fee. I decide to buy a stock for your account and call a broker to place the trade who charges .10 per share.....commissions are paid by the client, so this cost comes directly out of your money. This .10 per share goes to the broker as his compensation for service…in exchange for my directing your trade to this broker he keeps an account that accumulates a certain portion of that commission (lets say for every .10 per share he gets of trades from me, the broker deposits .01 into this “soft dollar” account). Now when this “soft dollar” account grows to a certain size I can use it to buy research products and he deducts the cost from the account. In theory I’m supposed to buy research that will benefit you (my client) because indirectly you actually paid for it. IMO, it is actually a way for me to extract more money from you indirectly (I’ve reduced my expenses becuase my clients are helping me pay for WSJ subscription, Bloomberg service, 3rd party research reports, etc). This indirect fee is why so much disclosure is required and why a client should be suspect of firms that use soft dollars.

1 Like
#6

Thanks Sponge_Bob, that makes this a lot clearer to me. I was having problems with this concept for some reason.

#7

Thanks Sponge bob… great example

#8

excellent example!

#9

You’re welcome. I am actually a money manager and we specifically market that we do not engage in “soft dollar” arrangements. When you explain to a prospect what “soft dollars” are they are usually shocked that some firms use them.

#10

Yes, I had no idea this is how it works!