On the heels of the SEC announcing last Wednesday its plans to establish guidelines on how soft dollars may be spent, Boston-based Fidelity Investments has decided to cut down on soft-dollar arrangements, a practice common in the mutual fund industry, in an effort to set an example for other firms, Reuters reports.
Earlier in the month, Fidelity began to pay Lehman Brothers separately for proprietary research. Although the SEC's proposed soft-dollar rules allow for such research to be bundled in with trades, since last year, Fidelity has been advocating for more disclosure of the value of proprietary research and the sums of money mutual funds spend on commissions.
"The issue of soft dollars calls for an industrywide solution, and we hope this will encourage that," said Anne Crowley, a spokeswoman for Fidelity. "No single company or broker can do this by itself. We need a level playing field" in order to lower commission cost trades and benefit mutual fund investors, Crowley said.
Managers receive soft dollars, such as research, from brokerages in exchange for sending the buy and sell orders at high commission rates. The reason the soft dollar practice has caused such a stir in recent years is the practice is very often abused and not disclosed.
"Pain will be felt first from the lower margins both on equity trading desks and asset management firms," Chris Meyer, an equity research analyst at Morgan Stanley wrote in a recent note. "This could put pressure on brokerage and asset management stocks." He estimates that if other firms begin paying for research in order to lower trading commissions, it could lower trading costs by 25% and brokerages' margins by 3 percentage points.
John Meserve, president of BNY Commission and Payment Services, noted that because Fidelity is so large, with $1.1 trillion in assets under management, it can afford to pay for research, but that smaller firms do not have the same advantage.