Research Unbundling and Soft Dollars

An asset manager doesn't just execute trades through a broker — it also consumes research from that broker: earnings previews, sector notes, management access, model calls. For decades this research was effectively free at the point of use because its cost was folded into the trading commission the manager paid to execute orders — a "soft dollar" arrangement, where research was paid for indirectly with client trading commissions rather than the manager's own money. The problem is obvious once you say it out loud: the manager, not the client, chooses how much research to consume, but the client is the one footing the bill through wider spreads or higher commissions, and there was traditionally no separate line item showing how much of the commission was for execution versus research.

What unbundling changed

MiFID II, effective in Europe from 2018, forced a split: asset managers must pay for research either out of their own P&L or from a separate, client-disclosed "research payment account" funded by an explicit, budgeted charge — but no longer allowed to just bury it inside commission rates without disclosure. This is unbundling: separating the cost of research from the cost of execution so each can be priced and disclosed on its own. In practice this meant managers had to put an actual price on research they'd previously treated as free, which led many large firms to simply absorb the cost themselves rather than pass it to clients, and caused a wave of consolidation among smaller sell-side research providers whose services suddenly had to justify a standalone invoice.

For example, before unbundling, a fund might pay a broker $2 million a year in trading commissions with no separate accounting for research; after unbundling, the fund might disclose paying $300,000 of that as a distinct, budgeted research charge and the remaining $1.7 million purely for execution — making it visible, for the first time, what research was actually costing the end client.

What this means in practice

The US never adopted a MiFID II-style hard split, so soft dollar arrangements (protected under a specific safe harbor, Section 28(e) of the Securities Exchange Act) remain more common there, creating friction for global managers who must run different research-payment models by jurisdiction. Regardless of jurisdiction, the underlying conflict — a manager choosing how much of a client's money to spend on research it consumes — is the reason regulators keep circling back to this area.