Soft dollars refers to a way in which money managers pay brokerage houses for their research. Using soft dollars means that in return for research, the money manager "pays" the brokerage house by using it to buy and sell stocks, thus racking up (and paying) commission fees that might be inflated to make sure the cost of the research is matched.
These in-kind transactions are legal, although some say investors would be better-served if their money managers paid for the research outright (with "hard dollars") and were then free to trade via another brokerage if it offered a better overall deal. Eschewing soft dollars, critics argue, would also promote transparency.
Investors are paying the fees either way: With soft dollars, the expense is part of trading fees; with hard dollars it is part of the annual fee the mutual fund or other money manager charges investors.
The CFA Institute's Centre for Financial Market Integrity has developed soft dollar standards to make sure investors' interests are protected.