Mindy Ying, an advisor with her own firm, PacWest Financial Management in San Marino, Calif., says she chooses from an expanding menu of independent research firms.

"We now depend on these firms to back up the models we are creating in house," she says. "We started using them some years ago and now we have become dependent on them, although we are constantly evaluating them and will often switch services," says Ying. She works with high-net-worth individuals, endowments and offshore accounts.

Grace, who has used an independent firm for the last three years, calls upon the independents to investigate the macroeconomic implication of the recommendations that his firm makes. "Some clients think their planning goals are the only thing they have to worry about. I used a research service to explain to them that there are other things that we need to consider in our plan," Grace says.

"The research firm is more adept than we are at questioning and figuring out where the economy is going. We need to know if the wind is at our backs. This is a way of reassuring clients that every relevant question has been asked and answered about a plan. It is also an important element in getting people to stay with a plan," Grace adds.

Soft Dollars Defined

What are soft dollars? According to The Barron's Finance and Investment Handbook, they are "the paying of brokerage firms for their services through commission revenue, rather than through direct payments, known as hard dollar fees."

Ted Aronson, a principal of Aronson+Johnson+ Oritz, a Philadelphia institutional investment advisor, offers a simple definition. "Soft dollars are any commissions that are not used to achieve best execution." Nevertheless, there is a Catch 22 to Aronson's explanation. "No one knows how to define best execution," he concedes.

Whatever soft dollar arrangements are-and there are more than a few professionals who would disagree with Barron's or Aronson's definition-they have a considerable history. Soft dollars were legally created by Congress and regulators in the wake of May Day 1975. That's when commission rates were deregulated. The SEC enacted Section 28(e), an amendment to the Securities Act of 1934. Investment advisors using soft dollars, under the section, must use the credit to provide "lawful and appropriate assistance" to the account manager carrying out responsibilities, the SEC said. Ultimately, this critical section was put on the books because of fears that the unfixing of commissions-bringing competition to something that had never had competition before-would lead to dirt-cheap prices. Without this safe harbor, managers who passed up the brokerage 99-cent store could be accused of breaching their fiduciary obligations. Still, the key goal was giving the retail broker and investor a better deal.

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