Soft dollars are research or other services an investment manager gets from a brokerage firm in return for sending it clients' trades, paid for with clients' commissions rather than the manager's own money.
Section 28(e) of the Securities Exchange Act gives managers a safe harbor: they don't breach their duty just by paying more than the lowest available commission, as long as they decide in good faith that the commission is reasonable for the brokerage and research they get. The SEC set out what qualifies in a 2006 interpretive release.
The SEC's brochure rules spell out the conflict. An adviser using soft dollars has to explain that it benefits because it doesn't have to pay for the research itself, that it may have a reason to pick a broker for those benefits rather than for the best execution of your trades, and whether clients may pay higher commissions as a result.
Soft dollars matter most when you pay commissions on trades. If your account pays none, the related question is what other support the firm gets from the custodian it recommends.
How to check
Read Item 12 (Brokerage Practices) of the firm's Form ADV Part 2A brochure, under "Research and Other Soft Dollar Benefits."
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