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Hard Dollar Compensation

Instructor: Lori Forrest

Lori has taught college Finance, Operations and Business courses for over five years. She has a master's degree in both Accounting and Project Management.

Financial planning and investing is a major part of our economy. Brokerage firms and traders are paid for services provided, known as hard dollars. This lesson will provide a basic investment overview and further explain hard dollar compensation.

Hard Dollar Compensation

Every individual or family financial plan will be different. In this way they are like snowflakes, each one is unique. Some investors may have a self-made plan and rely very little on their broker, whereas others may allow brokers to provide them full-service financial planning. Factors such as their age, family situations, career path, home planning, cash flow, retirement planning, travel planning and an individual's lifestyle will help a financial expert determine what is possible and what's not for their clients.

Investment Basics

Saving for retirement, saving for college, starting an emergency fund, a wedding, dream vacation, new home or other savings goals require individuals to make investment choices. Investors can self-manage their money or choose to hire a brokerage firm. Brokerage firms act as an agent for customers buying and selling financial commodities on their behalf, and in the process, charge customers a commission for these exchanges.

Let's assume you are an investor starting on your journey towards setting up an education plan for your children's education, buying a family vacation home and balancing a brand new business. How do you know where and what to invest in? You have some high level goals but are you willing and able to follow the market daily and stay up to date on all things going on with the industries and markets you choose to invest in? How quickly can you react to market news that may impact your investments? Considering you have a new business underway it's likely anywhere from 12-20 hours of everyday will be focused on making your business a success. However, all that hard work with be for nothing if your investments are not going to earn you money. This is where our brokerage firms come in. They partner with clients and create a financial plan for each individual or family need. The firm then represents the clients in the day-to-day management of their investments and decisions. This is a full-time job in itself and difficult for individual investors to truly accomplish on their own.

Retirement savings are one of the major investment goals for individuals.
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Broker Services

Broker firms provide many different services for their clients. Retirement planning, tax planning, investment advice, financial planning and budgeting, managing portfolios and research expertise can be provided for clients. Brokerage firms have analysts who are responsible for reporting, analyzing and providing recommendations for clients. The main benefit for investors is that brokerage firms provide clients full service wealth management.

Hard Dollars

Payments made by customers for services are made separate from the commissions earned on trading transactions. These actual payments are called hard dollars. Cash payments made for research, investment advice or services provided by brokerage firms are hard dollars. The fees investors earn for trading on behalf of their clients are not hard dollars. The opposite of hard dollars, soft dollars, is the payment brokerage firms receive in the form of commission revenue. Unlike soft dollars, hard dollars can be used for any purpose, including firm management.

Cash payments made for services provided by brokers are known as hard dollars.
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