Soft Commissions

DEFINITION of 'Soft Commissions'

Any type of commission that is not paid in actual dollars. Soft commissions allow investment companies and institutional funds to cover some of their expenses through trading commissions. For example, receiving research from a counterparty in exchange for using their brokerage services. Thus the expense would be classified as trading commissions and at the same time would lower their reported expenses on research in this instance.

BREAKING DOWN 'Soft Commissions'

There are a large number of investment funds that usually buy things in soft dollars, because it allows the fund to avoid reporting expenses to cost-sensitive investors. Soft commissions thereby allow funds to finance their expenses and ultimately lower their expense ratios. But this type of reporting has frequently resulted in reporting problems for fund companies for various reasons.