Brokerage Terminology

CFA Level II Ethics
#1

Hi all,

for some reason I am having trouble grasping the whole “brokerage” topic. I think the problem comes from the fact that I might not have the correct understanding of the term as such.

The book says:

“Brokerage refers to the amount on any trade retained by a Broker to be used directly or indirectly as payment for execution services and, when applicable, Research supplied to the Investment Manager or its Client in connection with Soft Dollar Arrangements or for benefits provided to the Client in Client-Directed Brokerage Arrangements.” (p.183)

This is what I take from this:

1. Brokerage is the commission that is paid on a trade

2. Here I am not sure (concerning the 2nd part of the 1st sentence) about the part after the “…and, when applicable…”: Is this this supposed to mean

“Brokerage refers to the amount on any trade retained by a Broker to be used directly or indirectly as payment (…) for Research supplied…”,

or

“Brokerage refers to (…) Research supplied…”?

So basically my question is whether Brokerage means payment (i.e. commission) for Research, or Research as such? Given that it says later on that “Brokerage is the property of the Client” it must mean that Brokerage = Research, as Brokerage = payment/commission would not make any sense in this case as a paid commission cannot be property (i.e. an asset) to the client, but the right to receive Research can. However, this would conflict again with 1. (see above).

I am probably just being retarded, but it would be great if someone could help clarifying this.

Thanks!

#2

Yes, brokerage is the commision you pay on the trades executed through a broker. Soft Dollars are basically a way of paying for services of the broker by directing business to broker. A ‘hard dolllar’ would be a direct payment like any other fee or bill. But, under soft dollar arranagment, the investment managment firm has an arrangement with the broker where the ‘payment’ is the business directed to the broker in the form of trades on the portfolios of the clients that they manage. Remember, investment managers don’t pay for the trading fees on accounts…the clients pay the fees. This is, in part, what is meant by 'net of investment managment fee and expenses" when you see a summary of a clien’t account.