Soft Dollars


DEFINITION of 'Soft Dollars'

A means of paying brokerage firms for their services through commission revenue, as opposed to through normal direct payments (hard dollar fees).

The investing public tends to have a negative perception of soft dollar arrangements because they believe that buy-side firms should pay expenses out of their profits, rather than from investors' pockets. As such, the use of hard dollar compensation is becoming more common.

BREAKING DOWN 'Soft Dollars'

For example, a mutual fund may offer to pay for research from a brokerage firm by executing trades at the brokerage.

Let's say that Large-Cap Value Fund (LCV) wants to buy some research from XYZ Brokerage Firm. LCV may agree to spend at least $10,000 in commissions for brokerage services in return for research from XYZ. This would represent a soft dollar payment. Alternatively, if LCV wanted to simply buy the research from XYZ and not agree to any kind of soft dollar fee, it might have to pay the brokerage firm $7,000 in "hard dollars" (cash) for the service.

  1. Hard Dollars

    Cash fees or payments made by an investor or customer to a brokerage ...
  2. Commission

    A service charge assessed by a broker or investment advisor in ...
  3. Quid Pro Quo

    A Latin phrase meaning "something for something". This term is ...
  4. Broker

    1. An individual or firm that charges a fee or commission for ...
  5. Value Fund

    A stock mutual fund that primarily holds stocks that are deemed ...
  6. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
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  1. What are soft dollars?

    The term soft dollars refers to the payments made by mutual funds (and other money managers) to their service providers. ... Read Full Answer >>
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