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RIAs need to take a hard look at their use of soft dollars

Some advisors are landing in hot water with the SEC

Author Les Abromovitz, Guest Columnist November 11, 2011 at 5:14 AM
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Les Abromovitz: [Soft dollar use] may affect the best execution of securities transactions and might cause the client to pay more than the lowest-available commission.

RIA Compliance

Bill Winterberg

Bill Winterberg

November 11, 2011 — 2:11 PM


Thank you for this update. Can you comment on the pricing discounts RIAs might receive for technology purchased under a custodian’s relationship? In other words, do advisers need to disclose the fact that they received, say, a 20% discount off retail price for portfolio management software purchased through the custodian? I believe the answer is yes.

Also, for those advisers who market themselves as “fee-only” advisers, do you think they can receive these discounts on software programs and still claim to be fee-only? I believe the answer is no.

In my opinion, discounts in tech purchases are analogous to soft dollars, only in this case, they’re credits for technology purchases and not in securities transactions. Advisers are saving a portion of their expenses, effectively “earning” revenue from sources other than client fees.

Warm regards,

Les Abromovitz

Les Abromovitz

November 11, 2011 — 3:33 PM

Hi Bill-

You raise several important issues. I do agree that advisers should disclose discounts and other benefits received from custodians on their Form ADV Part 2 disclosure brochures.

With regard to your second comment, I have advised several RIAs that they should not call themselves “fee only” if they accept soft dollars. There are other compliance consultants who disagree with my take on this issue.

Although your argument is compelling and very logical, I do not believe that advisers who receive discounts forfeit their right to call themselves “fee only.” To carry your argument one step further, every RIA receives benefits from the broker-dealers they use that save them money and reduce their expenses. In theory, no RIA could refer to the firm as “fee only,” because it receives benefits in some form from the broker-dealer executing clients’ trades.

Certainly, all of these discounts and soft dollar arrangements should be addressed when the RIA evaluates best execution. They should all be considered when evaluating whether the firm has met its fiduciary duty to seek best execution of clients’ transactions.

Thank you for your thoughtful comments.


Jerry Kalish

Jerry Kalish

November 11, 2011 — 4:52 PM


Excellent discussion of the issues involved, and all the more relevant in the ERISA context of both participant and service provider fee disclosures effective next year. But that’s a topic for another day.



David Maurice

David Maurice

November 15, 2011 — 5:18 PM

This a excellent and illuminating discusssion.

I think a distinction can and should be made between recieving discounts that are highly common if not universal in RIA arena which are affected by no more than mentioning a custodian in use by an RIA firm and discounts which are affected by purchasing software which has been designed specially for a particular custodian for use by its advisors e.g. Morningstar contracted wtih TD Ameritrade to provide a scaled down version of its Office Edition which is economical. The full scale version is available at discount without purchasing through TD. I do not feel that my purchase at a standard discount to virtually any RIA using most custodians needs to be diclosed on our firm ADV. I could be wrong and certainly would love to hear other opionions with supporting arguments.


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