As regulators around the globe beef up their enforcement of best execution rules, wealth managers need to pay attention now more than ever. When trading assets, brokers are required to seek the best execution reasonably available to fill their customers' orders. Similarly, advisors need to prove that their client’s total costs (or proceeds) in each transaction are the most favorable under the prevailing market conditions. For wealth managers, meeting best execution mandates means having a systematic approach in place to report on these fiduciary responsibilities.
Fines plus disgorgement
Every country has a regulatory body that examines firms’ abilities to provide best execution. One of the few areas about which global regulators are consistent is that penalties for non-compliance can be harsh. In the U.S., the SEC may suggest initial one-off penalties from $15K-150K. And if they find a systematic problem that has existed for years, fines can grow very quickly and include six-figure disgorgement numbers, which is the cost to make clients “whole.”
One regulator’s reviews from more than 1,500 examinations pointed to a range of deficiencies:
- Inability to show regular and systematic review of brokers and their consideration of best execution.
- Not considering the cost or quality of competing broker-dealers.
- Lack of communication about procedures and a further lack of consistency in following procedures.
- Missing full and fair disclosure regarding a soft dollar program.
- Not following best execution policies and procedures.
Of course, advisors who cannot show clients that they are doing everything they can to maximize returns for them—through best execution and other means—will face a whole other set of problems besides regulatory punishments.
How to prove best execution?
First, establish and document a robust best-execution process. This should include:
- Define and monitor slippage from the point where an order enters the system.
- Establish and maintain a process to oversee existing broker-dealers and select new ones.
- Use industry-standard benchmarking techniques to establish a baseline for trading performance.
Then, create a trade measurement infrastructure that promotes compliance with best execution:
- Deliver and review reports on a systematic and regular basis.
- Pro-actively and preemptively identify and address issues in quality of execution.
- Support the use of best execution analyses across business lines.
Finally, regularly evaluate and monitor your best execution process; critical elements might include:
- Regular adjustments to your written procedures.
- Make sure best execution remains an integral part of your evolving workflow.
- Coordinate program requirements across complementary business lines.
When a measurement program is in sync with the trade-implementation workflow, compliance is seamless and consistent.
A best execution solution
SS&C’s Global Wealth Platform (GWP), in partnership with Abel Noser Solutions, a leading trade analytics provider, can help you develop and deliver a robust transaction cost analysis (TCA) program to meet your best execution requirements. GWP offers the infrastructure and tools to monitor order entry and execution workflow, automate exception reporting, oversee existing broker-dealers and generate insights.
GWP’s interface connects seamlessly to Abel Noser’s platform, which uses the client’s own trade data, combined with nearly $17 trillion in market and trade data, to compare and measure it against benchmarks comprised of anonymized peer activity. As the basis of a reporting structure, this peer analysis can be conducted for all exchanges, all securities and all asset classes, and delivers systematic TCA monitoring relative to other firms. Clients can grade each trader or simply rank their brokers’ performance relative to an industry expectation.
With good procedures, regular tracking and execution quality analysis, managers can rest easy when regulators arrive to examine the client’s best-execution results.
For GWP clients, Abel Noser offers a free evaluation of the client’s trade data, including best execution analysis and a review of their best execution process. To find out more, contact us.
Alternative Investments, Asset Management, Commercial Lending, Insurance, Regulation, Wealth Management