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July 31, 2002

Report: Soft Dollars Hinder Performance?

By John A. Byrne

Soft dollars are hurting portfolio perfor mance, according to a new study.

Each penny per share spent in brokerage commissions reduces a typical portfolio's annual return by six basis points, claims the study by Ennis Knupp + Associates in Chicago. That's despite another view that soft dollars ensure the continuing flow of vital information from small, but specialized research houses to investment managers. With scandal tarnishing the reputation of research published by investment banking firms, specialized independent research has become more important.

Soft dollars effectively reduce a fund's overheard costs, some note. They allow a money manager to obtain, for instance, $1 in soft dollar services for each $1.60 in brokerage commissions, even while paying slightly more than the lowest available commission rate. The Ennis study recommends that investment managers should pay for research out of investment management fees in place of soft-dollar arrangements.