What Is A Soft Dollar Agreement

Posted in Uncategorized by Hemant Naidu on April 15, 2021

The term “flexible dollars” refers to payments made by investment funds and other fund managers to their service providers. The difference between soft and hard dollars is that instead of paying service providers in cash (i.e. hard dollars), the investment fund pays benefits in kind (i.e. with soft dollars) by passing the activity to intermediation. In our last article, Craig began our discussion of business practices by examining a consultant`s duty to get the best execution. This contribution puts our discussion on business practices with a focus on soft dollar agreements. The public that invests tends to have a negative perception of soft dollar agreements. Many investors think that buy-side companies should pay expenses on their own profits. As a result, the use of hard dollar allowances is becoming more common. Suppose a high-value fund wants to buy research from XYZ Brokerage Firm. The fund may agree to spend at least $10,000 on commissions for intermediation services in return for research, which would be a soft dollar payment. If the fund simply wanted to buy the research, it might have to pay $7,000 in hard dollars (cash).

Let`s take a look at an example: Wittenberg LLP provides computer equipment and software to MegaMutual Fund for the transmission of investment information. As part of an agreement or agreement between the two companies, MegaMutual will pay for these services by transferring business to Feral Hitch, a large brokerage. Feral Hitch charges extra for MegaMutual trades. The money from these fees will then go to Wittenberg, who will in turn receive his compensation for his benefits to MegaMutual. The supplement is usually one-tenth of a cent, but as MegaMutual processes billions of shares a day, the amount added to real money – the fees it would have had to pay in hard dollars. In brokerage, sweet dollars have been in use for many years. Before May 1, 1975, sometimes referred to as “May Day,” all brokerage firms used a fixed-price commission plan published by the New York Stock Exchange; [7] The calendar was a matrix showing the number of trading actions on one axis, the share price per share on the other axis and the corresponding commissions in the cells of the matrix. As brokers/traders were traditionally required to charge a fixed commission and could not compete by reducing the commission of a trading, they quickly competed by providing additional services to their institutional clients. In the sector, this became known as the “bundling” of services with commissions. [8] Soft dollars are a way for investment funds to get services without having to pay directly for them.