Question

What’s soft dollars? Why it is unethical?

Answer 1

What a brokerage earns when it provides certain services to investment funds, such as research, and agrees to be compensated indirectly in the form of commission income (by the fund executing trades through the brokerage), the payment is said to be in soft dollars. If a brokerage is paid directly for a service, it is earning hard dollars.

Soft dollar is considered unethical by investors because they believe that buy-side firms should pay expenses out of their profits, rather than from investors' pockets. As such, the use of hard-dollar compensation is becoming more common.