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April 30, 2004

Study Finds Soft Dollars Too Pricey for Investors

By Gregory Bresiger

Investors and fund managers would fare better if soft dollars relationships were ended. That's even though their management fees would likely rise and some brokers would be hurt.

Those are some of the conclusions of a study, "The Economics of Soft Dollar Trading," by scholars Benn Steil and Diego Perfumo.

"We reach the surprising conclusion that both fundholders and fund managers can ultimately benefit from the unbundling of trading commissions - that is, from fund managers paying for non-trade execution services with hard dollars," according to the study. "The clear losers from the unbundling would be the traditional full-service brokers."

The study, which was recently submitted to Congress, says the average investor now using soft dollars would pay 52 basis points less if soft dollars were eliminated. This also assumes that the management fee, without soft dollars, rises by 18 basis points.

So why don't soft dollars go? The authors write that, "Although many buy-side traders have long been proponents of eliminating soft dollars, upper management at their firms have been concerned that clients will react negatively to any rise in management fees..."