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Subject:  Re: Soft dollar mutual fund fees? Date:  1/1/2004  3:45 PM
Author:  Littlechap Number:  11566 of 18064

You don't hear much about soft dollaring in the media, and what you do hear is often wrong, since very few people really understand how it works.


I don't mean this to be catty, but I honestly did not come up with any understanding of this phenomenon from your message, either. For one thing, I quickly lose track of the conversation when "soft dollar" is turned into a verb.

Other things are not clear to me as being evil, or even unusual:

Vanguard chooses Goldman, paying $6,000 for the trade instead of $3,000. In return, Goldman agrees that $1,000 of the commission will be soft dollared, that is, Goldman will provide $1,000 of some service to Vanguard.

Again, the term has turned into a verb, which doesn't help. But besides that, I would need a clearer understanding of how this process differs from the standard practice, common throughout all industries, of being able to charge a higher price by offering a "value-added service."

Superficially, we might think that a mutual fund simply buys and sells securities. But in true economic terms, every business transaction is an exchange of *value*. Sometimes the value is "soft" in the sense that it is merely perception -- like the yuppie image of Starbucks that allows them to overprice their coffee. Obviously, buyers think the image has enough value to offset the extra cash involved.

Okay, so what is actually going on when a mutual fund buys a stock? I think many people here have echoed my notion of mutual funds, which is that I don't mind paying an expense fee in return for the manager doing the stock-picking for me. He/she is almost certainly going to do a better job than I could do, given the time and resources I have available to devote to it. And that is worth money to me.

From what I can tell in these messages, some brokers charge more for a stock transaction but give back more value to the buyer, in the form of research that helps the buyer. And the buyer is the fund manager -- the very person who I am paying to get me the best possible results. If he/she makes a calculation that the service is worth the money, then I would not object.

Before I get upset over it, what I'd want to hear/see is some clearcut evidence that managers of funds I own are *wasting* my money. And the way that could happen is if the "value-added service" they get does NOT ADD VALUE. Well, I think that would require looking at each specific transaction, and finding out if a researcher helped a fund choose better stocks and buy them at more appropriate times, than would otherwise have happened. If, by way of a given transaction, a fund achieves .1% better performance for me, and the manager has spent .1% more fee to get it, that seems fair to me.

If you can be more precise -- perhaps cite specific cases with documentation or something like that -- of cases that are blatant featherbedding or whatever, then I'd be glad to hear about it. I am glad to hear that the SEC is putting the heat on, and I'm glad to see some of my funds dropping their fees a little bit because of that heat. But I don't want to get all worked up over yet another issue, without knowing for certain that it is worth my concern. So, thanks for any help! :-)
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