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  • Writer's pictureRita Rhodes

Best Execution Review

Updated: Dec 31, 2023


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As a fiduciary, a registered investment adviser has an obligation to ensure best execution. But what does that mean, exactly?


"Best execution" refers to the regulatory obligation for financial institutions to execute client trades at the most favorable terms reasonably available under the circumstances.

 

Many advisers will align their firms with just one or maybe two qualified custodians (such as Schwab or Fidelity, for example). These firms offer programs for advisers that include providing custody of client accounts as well as providing brokerage services for client transactions. These programs will also offer access to other benefits, such as:

 

  • technology to facilitate account applications and client service requests;

  • ability to view client statements and tax documents;

  • an electronic trading platform, with electronic confirmations and trade blotter;

  • a dedicated service team to handle requests;

  • informational resources, such as seminars or conferences; or

  • discounts on products or services from strategic partners.

 

When you use one of these adviser programs, all client transactions are executed through the custodian or a broker-dealer affiliated with the custodian. You aren’t out shopping around for a broker to give you the best execution price for each trade you make.

 

Once you align your practice with a custodian, it’s not easy to switch to another custodian due to the administrative tasks involved, such as communicating with clients, repapering all the client accounts, updating your disclosure documents and advisory agreements, and changing your policies and procedures. You have to have a pretty darn good reason to put yourself and your clients through that heartache.

 

So how on earth do you fulfill your fiduciary obligation of best execution, if you're only executing trades through one broker? 

 

The good news is that broker-dealers also have best execution requirements and standards they must uphold. Brokers are required to report to the SEC information about order routing on a quarterly basis (Rule 606 reports), and provide monthly reports on execution quality. Therefore, as an investment adviser who uses a custodian’s advisory program, it is reasonably safe to assume you can rely on the best execution policies of your custodian to fulfill your fiduciary responsibilities.

 

However, regulators will still ask you about your best execution policies, so you should still demonstrate that you are reviewing best execution at least annually. Basically, this is an annual due diligence review of your custodian. Some things you can do to document your annual review include:

 

  • Review the custodian/broker-dealer best execution information. This information is usually available on the custodian’s website. Download a copy of the information and save it in hard copy or electronically. The best execution information for some common custodians can be found in the links below. (If you use a different custodian, you can usually find the information pretty easily by Googling “[custodian name] best execution.”)

  • Charles Schwab

  • Fidelity

  • Altruist

 

  • Document your reasons for staying with the custodian. Aside from executing trades, what else does the custodian do for you and your clients? Keep a list of the benefits you receive from the custodian (see examples in the bulleted list above) that make the relationship beneficial to you as well as in the best interest of your clients.

 

  • Work with your custodian to improve services. Schedule an annual call with your service team to discuss any customer service issues and what can be done to improve communications and services you receive. Ask what the custodian is doing to provide best execution.

 

In addition to this annual review, I suggest periodically comparing the services of other custodians to make sure that your custodian is still the best fit for you and your clients. This can be a time-consuming task, so it's probably not something you want to do every year, but maybe every 3-5 years. As I already mentioned, it is difficult to change custodians, but if you have ongoing concerns with customer service issues, trade errors caused by the broker, or the value received for the cost of service, at some point you may need to weigh your options to see if it’s worth the effort to transition to another provider.

 

The SEC issued a Risk Alert in July 2018 regarding common best execution issues. This Risk Alert is worth a read. Common issues found by regulators during examinations included:

 

  • Not performing annual reviews.

  • Not having adequate policies and procedures.

  • Not doing what the policies and procedures said.

  • Not comparing information from other broker-dealers.

 

Take some time this month to review your best execution policies and procedures, and document your review of your custodian's best execution practices.

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