Registered Investment Advisers (“RIAs”) have a fiduciary obligation to seek best execution of clients’ transactions. Securities regulators are likely to focus on best execution during compliance examinations, especially if Investment Adviser Representatives (“IARs”) of the RIA are also registered with a broker dealer and execute client transactions through the broker dealer. Their evaluation may also be influenced by whether an RIA receives soft dollar credits from the broker-dealer recommended.

RIAs are not obligated to obtain the lowest commission available. They are, however, required to determine whether the transaction represents the best qualitative execution for their clients. Whenever trading creates a conflict of interest, the firm must first obtain informed consent from clients after fully and fairly disclosing all material facts.

RIAs have been sanctioned for failure to implement policies and procedures that are reasonably designed to ensure best execution. An RIA’s policies and procedures should articulate how the firm seeks best execution. These policies and procedures should be consistent with the RIA’s advisory agreement, as well as its Form ADV disclosure brochure. An RIA must make certain that advisory personnel are adhering to those procedures.

Price is just one element of best execution. RIAs must also evaluate the:

  • Execution capability regarding different types of orders and securities, i.e. block trades, derivatives, etc.;
  • Value of research provided by the broker used in making investment decisions;
  • Responsiveness to requests for trade data and other financial information;
  • Broker-dealer’s financial strength and reputation;
  • Confidentiality of transactions;
  • Adequacy of the broker/dealer’s back office staff to handle trading activity in volatile or high volume markets; and
  • Statistics on frequency of errors.

An RIA should provide a plain English explanation of its efforts to achieve best execution in the firm’s Form ADV disclosure brochure. RIAs have received sanctions for misrepresenting how they selected a broker-dealer for clients.

RIAs must keep thorough books and records to prove that it conducted an evaluation of broker-dealers for purposes of best execution. An RIA must conduct a comparative analysis of the available broker-dealer alternatives.

Best execution is not a one-time exercise. RIAs must periodically evaluate the performance of broker-dealers relied upon to execute clients’ transactions.

RIAs have compelling reasons for pursuing best execution aside from satisfying their fiduciary obligations. Inefficient execution and higher transaction costs will have a negative impact on clients’ performance.

About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Boca Raton, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.

RIA Compliance Group, LLC – 5301 North Federal Highway, Suite 380, Boca Raton, FL 33487 –
Tel: 561-600-0564 –