I’ve read several definitions and examples of soft dollars and I’m still confused on what this is. In the example here: http://www.investopedia.com/terms/s/softdollars.asp , would this be allowed because the “soft dollars” benefit the client (research)? Really I’m confused about how you could even use “soft dollars” to buy a fancy chair or new snake skin boots since it seems to me that there really are not any dollars changing hands here. Or maybe I just have no clue what’s going on here. Thanks in advance.
IMO Soft dollars are arrangements you make with others where you get something without paying for it. You can be directing business their way or providing a service and getting compensation back someway (monetary or non-monetary). Heres a hypothetical, you, as an advisor choose to do all you’re trading (for clients portfolios) with XYZ broker because in exchange for this they will offer to pay your office rent. This is a soft dollar arrangement. This would be a violation because it doesn’t benefit the client, even if you disclosed it its still a violation. Another soft dollar arrangement would be doing business with the same broker XYZ and in doing so they would give you access to all their research reports (in this case it benefits client) you would still have to ensure that in choosing XYZ broker they offer best trade execution and its in the clients best interest to have you do your trading through them. Of course you have to factor in the benefit the client will get by you getting those research reports. Any soft dollar arrangement must be fully disclosed, and it MUST benefit the client if its to be acceptable.
good summary, Matt. I would add, too, that adherence to soft dollar standards is “recommended” under the CFA Standards of Professional Responsibility, not mandatory. If the item set wants it to be a violation, make sure it says Firm ABC claims compliance with Soft Dollar Standards.
someone correct me if i am wrong as i am having trouble with this one too… if an advisor directs trades through a specific broker and receives in return some service that does not directly benefit the client, it is compliant with the standards so long as it is disclosed to the client and the manager does not pay more for it. if the manager pays more for it than a separate equally good broker, it is a violation even if it is disclosed to the client. the manager can only pay more for a broker if he receives a service that directly benefits the client (research reports, etc.). In this case, disclosure is not required to the client. thoughts?