News & Commentary

Soft Dollars
January 29, 2004

Mutual funds began with the idea of bringing Wall Street to Main Street. By offering the well-intentioned but unsophisticated investor participation in broadly diversified portfolios of stock, the capital markets saw much needed liquidity and the investor could share in the world’s most prosperous economy. This is the way it was supposed to work. But as usual, greed, avarice and opportunity brought out the worst in human nature.

Beginning in 2003 and for many years to come, state and federal authorities will ferret out and seek justice for mutual fund managers, big and small, who have abused their client’s trust and profited illegally. The issues present a complicated quagmire of trading schemes involving hundreds of billions of dollars of investor’s funds. One of the issues you will hear a lot about in the months ahead is “soft dollars.” What are they? Consider when your mutual fund manager buys or sells shares of stock, the fund is charged a commission by a brokerage firm just as if you the investor had entered the transaction. When the mutual fund is given a soft-dollar credit for a portion of the commission to be used to purchase “investment research,” the investor winds up paying what amounts to an additional fee. In the long run, which is what holding mutual funds is all about, soft dollars impact the investor’s return with no assurance there was value added.

The issue of soft dollars goes far beyond the mutual fund industry. Any bank or money manager that purchases common stock for its clients may well be receiving soft dollars for as much as one-half the commission.

From inception, the management of Investors’ Security Trust Company recognized soft dollars as a problem: they are a direct cost to our clients. It is our policy never to conduct a soft dollar transaction and as a result, we trade shares for commissions between one and one half and three cents per share. We see it simply as an issue of fair play. To your benefit, it would be difficult to find commissions any lower; but most of all we want you to know where we stand. Your financial well-being is first, last and always: integrity is the watchword for all our client relationships.

Charles K. Idelson
President and Chief Executive Officer


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