Institutional Investors Ramping Up Soft Dollar Allocations

Institutional investors have revived their use of commission payments for “soft dollar″ allocations, as the Securities and Exchange Commission (SEC) seems to have backed off its push to dramatically overhaul the rules governing such payments, according to recent research by Greenwich Associates.

According to the firm, institutions are starting to return to paying third-party brokers for research and other services based on a growing belief that the SEC is not planning a dramatic overhaul of rules pertaining to Section 28(e). The SEC made the proposal to overhaul Section 28(e) in 2005, but has not yet implemented a rule change.

According to the firm, institutions had taken a more conservative stance with soft dollar arrangements as they waited for regulators to make a ruling. Industry-wide, soft dollar totals dropped 25% to $725 million in the 12-month period ending in February 2007 from $970 million the prior year, according to Greenwich Associates.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

As recently as 2004, more than 80% of institutions used soft dollars; by 2007 that proportion had fallen to 62%. In keeping with the general decline in usage, commissions directed for third-party products and services have dwindled as a proportion of overall U.S. equity commission payments, which totaled some $10.3 billion in the year ending February 2007, according to the announcement. Payments for third-party research products and services represented 9% of total commission payments in 2005 and 2006, but only 7% this year, according to Greenwich Associates.

However, use of such arrangements is expected to regain steam. When Greenwich Associates asked institutions to project their intended third-party products/services budgets for the coming year:

  • Institutions predict a bounce back to 10% of total commissions;
  • Investment managers predict that third-party allocations will jump to 13% in 2008;
  • Banks expect to increase allocations slightly from the current 20%;
  • 30% of institutions have set up client commission-sharing arrangements with brokers; and
  • 60% say they will have one in place within the next 12 months.

«