New York, NY – According to an article in the September 10, 2007 issue of Wall Street Letter, a majority of US investment advisers have banned the use of soft dollars to pay for third-party research.
The WSL article, based on a survey conducted by the Investment Adviser Association, reported that 59% of the 457 investment advisers surveyed have eliminated their use of soft dollars. Apparently, this move has been prompted by a variety of factors including bad press surrounding the use of soft dollars, Chairman Chris Cox’s letter to Congress a few months ago requesting the banning of soft dollars, and plans to disclose commission costs to fund boards.
In addition, a growing number of pension fund and plan sponsors are increasingly putting pressure on their fund managers not to use soft dollars due to fiduciary concerns.
While interesting, the data provided by the Investment Adviser Association survey is somewhat overstated for a number of reasons. First, the IAA is comprised of only 500 members (though many of these firms are some of the largest buy-side firms in existence). This organization also does not include a number of important types of buy-side firms — like hedge funds, banks, pensions and endowments, etc. It is also unclear if the firms that say they no longer use soft dollars have merely switched to CSAs or CCAs.
In fact, the IAA survey presents a much more bearish picture for soft dollars than other industry surveys we have seen. In a recent report, Greenwich Associates reported that over 60% of all buy-side institutions currently use soft dollars to pay for third-party services.
Another major issue with the IAA survey is that it reflects investment advisers use of third-party soft dollars, NOT total soft dollars. As we haved mentioned numerous times in the past, the SEC views soft dollars as all commissions paid by money managers in excess of the cost of execution. This means that most investment advisers are using soft dollars to pay for sell-side research.
Unfortunately, most money managers and investment advisers remain confused about this important definitional distinction. This fact has been corroborated in the past by senior SEC executives who have commented about the rampant mistakes made by money managers in filling out their Form ADV regarding soft dollar use.
Despite these issues, the IAA survey is another indication of the significant changes taking place in the financial services and investment research industries.