Soft Dollars

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Commission

    A service charge assessed by a broker or investment advisor in ...
  2. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  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. Hard Dollars

    Cash fees or payments made by an investor or customer to a brokerage ...
Related Articles
  1. Wrap Accounts: A Gift Of Advice?
    Bonds & Fixed Income

    Wrap Accounts: A Gift Of Advice?

  2. What are soft dollars?
    Investing

    What are soft dollars?

  3. Mutual Fund Basics Tutorial
    Mutual Funds & ETFs

    Mutual Fund Basics Tutorial

  4. Cut Your Tax Bill With Donor-Advised ...
    Taxes

    Cut Your Tax Bill With Donor-Advised ...

comments powered by Disqus
Hot Definitions
  1. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  2. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  6. Budget Deficit

    A status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer ...
Trading Center