Soft Dollars

Soft dollars are credits that result from arrangements between brokers and fund managers, where the broker provides the fund manager with both the execution of brokerage transactions and research-related products and services. Fund managers use the fund's assets to pay for the brokerage commissions when buying and selling portfolio securities. Does the fund manager breach fiduciary responsibility by using client assets for his or her own benefit? Absolutely. Fund managers using soft dollars face a conflict of interest between their need to obtain research and their clients' interest in paying the lowest commission rate available and obtaining the best possible execution. One SEC report indicated that soft dollars have sometimes been used for products and services that clearly seem abusive and inappropriate. Will the Soft Dollars go away? There is a lot of talk about limiting and regulating the use of soft dollars. The people who want to get rid of soft dollars argue that such an action will better align the interests of fund managers and fund investors. In addition, they say that investors will find it easier to understand the costs of various investment products and services used by fund managers. It is difficult to predict the outcome, but there will be far reaching consequences for funds, brokers, research and research-related service providers.