New research from Greenwich Associates shows that soft-dollar commissions used by institutional investors to purchase third-party research and services fell to an estimated $1.13 billion in the first quarter of 2005 from the reported $1.25 billion in the same period a year earlier.
Last year, US institutions had predicted that the combined amount spent on soft-dollar transactions and commission recapture arrangements would account for only 11% of their total US equity commissions by 2005. Instead, soft dollars alone accounted for 10% of commissions, and when commission recapture is added, the combined amount represented approximately 17% of total US equity commissions paid to brokers during the 12-month period, Greenwich Associates said in a news release.
“US institutions are clearly adopting a more conservative approach when it comes to paying for brokerage research and services with soft dollars,” Greenwich Associates consultant Jay Bennett said in the news release. “However, since the Securities and Exchange Commission’s review has taken longer than many investors had anticipated, the majority of US institutions in the last 12 months have decided to await the regulator’s final word before making any further changes to their own business practices.”
Despite indications from the SEC that a soft-dollar ban is not in the works (See Soft Dollar: Fixing the Leaks ), the proportion of institutional investors using soft dollars continues to decline, Greenwich Associates said. Less than three-quarters of US institutions reported using soft dollars over the past 12 months, down from 82% last year, and 86% in 2003.
Considering Statements Carefully
However, pronouncements by institutional investors about forsaking soft dollars must be parsed carefully. “While certain institutions have stopped soft dollars completely, many of the companies that have taken strong stands with regard to their own soft-dollar policies have explicitly excluded soft-dollar payments for market data services, including price quotes, data terminals, and others – but have not cut out soft dollars for third-party research providers,” said Greenwich Associates consultant John Colon in the announcement.
Greenwich said that a consensus has built that certain services are appropriate for soft dollar payments including financial market quotes (such as Reuters and Bloomberg), which are paid for with soft dollars by more than 80% of US institutions. Also in this category are third-party research produced by vendors and non-broker dealers and financial databases – both of which are purchased with soft dollars by more than three-quarters of investors – and third-party research produced by “independent” boutiques, which is paid for with soft dollars by nearly 70% of US institutional investors, according to the research.
About 60% of US institutions also use soft dollars to pay for electronic news and information services. However, the future of these soft-dollar arrangements appears less certain, Greenwich Associates said. “The emerging standard of eligibility for soft-dollar payment seems to be that the service must provide some value-added analytical or intellectual content,” said Colon. “This test can be difficult to apply to electronic systems that provide a wide range of market data, news, and other services. For now, institutions and brokers will have to evaluate for themselves whether a given service is simply a raw data stream – which apparently would not qualify as ‘research’ under this definition – or a source of some analytical content.”
Across the board, more institutions are opting to pay hard dollars for services whose classification as research is less than clear cut. For example, only 20% of institutions pay soft dollars for news subscriptions and publications, which are purchased with hard dollars by more than 55% of institutions, the research showed.