Some mutual fund managers now obtain immediate executions on electronic markets for less than a penny a share. According to data from one fund, such costs were over twice that only four years ago. Yet when I think about today s soft dollar arrangements and their impact for investors, I keep coming back to the notion that fund advisers are paying their expenses with other people s money . Let s face it extraordinary increases in volume over the last few years have generated revenues that are just as impressive for most brokers. Part of the reason, I fear, is a perception among portfolio managers and independent directors that six cents is safe or rather, fund managers can pay up to six cent commissions and not raise any red flags.
Managers have a duty to seek best execution and directors have a duty to inquire about the process.
To this point, a recent Commission examination of independent director oversight of soft dollar arrangements has turned up findings that are troublesome. Some directors, it appears, pay little or no meaningful attention to the brokerage costs of mutual funds. Directors must ask the tough questions of fund advisors. Our study showed that independent directors need to put more pressure on managers to drive hard-bargains with their brokers. There is no substitute for asking hard questions about order routing arrangements, to ensuring investors reap the full benefits of the dynamic competition unfolding in our markets.