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What Are Hard Dollars?
Let me explain hard dollars to you directly: they are the cash fees or payments you make as an investor or customer to a brokerage firm in exchange for their services. These hard dollar payments are typically fixed amounts that you know about before you even start dealing with the broker.
When I talk about hard dollar payments, I'm referring to things like set transaction charges, monthly account maintenance fees, and even paying for research that the brokerage provides.
Understanding Hard Dollars
If you need research from a brokerage, you can pay for it with a straightforward cash payment—that's a hard dollar arrangement. But if you prefer, you could use commission dollars from trades with another firm and allocate some of those to pay for the services or research instead. That alternative is what we call soft dollars.
Example of Hard Dollars
Take this scenario: if you're a client seeking research from a broker or investment bank, you might normally pay for it by trading with them and generating commissions. However, if you don't have a trading relationship with that bank or broker, you can just send them a check—that's hard dollars in action.
On the other hand, if you have a soft dollar setup with another broker, where you have commission funds earmarked for research and other needs, you can instruct that soft dollar broker to pay the other firm for the research. If you direct the payment through the soft dollar broker instead of sending a check yourself, it's a soft dollar payment.
To put it plainly, hard dollars stand apart from soft dollars because soft dollars come from commission revenue earned through trades or are deducted from other transaction values. Think of hard dollars as real, physical cash payments, while soft dollars are handled through commission dollars from a soft dollar broker.
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