TechTalk

TechTalkblog

InvestmentNews takes advisers through the developments and innovations in technology that’ll change the way you do business today—and tomorrow.

Best practices for best tech execution

The SEC requires advisers to provide the best execution for their clients' trades. This obligation is an evolving standard that necessarily involves a “facts and circumstances” analysis.

Feb 27, 2014 @ 8:45 am

By Trent Mumma

Orion's Trent Mumma
+ Zoom
Orion's Trent Mumma

The SEC requires advisers to provide the best execution for their clients' trades. This obligation is an evolving standard that necessarily involves a “facts and circumstances” analysis.

Although best price is an important consideration in this analysis, best execution encompasses many factors. The specific factors considered will differ among advisers, but all advisers are required to disclose the factors they take into account in Part 2 of their ADV form.

Advisers today are generally familiar with the very important best-execution responsibilities they must meet for mutual fund trades. Increasingly, however, advisers are trading exchange-traded fund, which can be bought or sold throughout the day, making best execution more of a moving target. Additionally, more advisers are using technology providers that allow them to execute large block trades, rather than trading primarily in individual client accounts.

As a result of these recent developments, many advisers are looking to establish new procedures to help ensure their continued compliance with the SEC's requirements for best execution when trading ETFs. In response to these concerns, we suggest the following as guidance for advisers who may be getting started with ETF trading:

1. Know what you are trading.

When executing a block trade, it is essential to know the average daily volume for an ETF. If the block trade represents more than the ETF's average daily volume, the execution price will almost inevitably be poor. We recommend that if a trade represents more than 3% of the fund's average daily volume, the adviser should have it worked, either with a limit order or by giving the executing broker special instructions, so as to move the execution away from themselves onto a trade desk.

2. Obtain multiple quotes when trading.

Advisers typically execute with one custodian, but if they are creating large block trades, it is to their advantage to form outside relationships with market makers or agency desks. Advisers can often get a competitive quote from an outsourced trade desk, without necessarily having to execute through it. The adviser can then bring that competitive quote back to their customary custodian or executing broker to negotiate a better execution price.

3. Custodian trade away fees can be negotiated.

Many custodians impose high fees, up to $20+ per transaction for a trade away, which obviously limits an adviser's flexibility in seeking best execution. Recently, however, custodians have responded to mounting criticism regarding their fees and have begun to explore ways to adjust them on a case-by-case basis at the request of the adviser.

4. Two-sided quotes are especially advantageous.

The executing broker in these cases does not know if the adviser is buying or selling. This will often motivate the broker to provide the best possible price.

5. Providers of ETFs want advisers to be better informed.

ETF providers such as BlackRock Inc.'s iShares unit or the Vanguard Group Inc. want to educate advisers regarding best practices for trading their products. They often have desks that will provide neutral answers to questions regarding spreads, best venues for execution, executing brokers that specialize in a particular ETF, and more.

Above all, best execution does not lend itself to a “one size fits all” approach. It is the adviser's responsibility to provide the most advantageous order execution for their customers. It is important to remember, however, that these orders can be executed in a number of ways, and the methods chosen will not only affect the investor's net profit or loss on the transaction, but also the adviser's revenue.

Trent Mumma is the Trading Manager at Orion Advisor Services, a portfolio accounting service provider founded by and for investment advisers.

0
Comments

What do you think?

View comments

Recommended for you

Featured Research

The 2015 InvestmentNews Adviser Technology Study

This in-depth study provides a blueprint for the industry, providing actionable information to advisers, along with the latest solutions to help them drive profitability, efficiency and growth for their firm.

Featured video

INTV

Wirehouse training programs are in vogue

At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Nationwide's 401(k) record-keeping fees are excessive, lawsuit claims

Plaintiffs claim practice of charging plans a percentage of assets is unreasonable.

Wealth management firms struggle with lower fees, fewer new clients

Advisers in North America earned less from clients last year and saw a decline in average fees, according to a new report by PriceMetrix.

These investors are allowed to put $500K into a Roth IRA at once

The HEART Act permits rolling all or part of life-insurance and combat-related-fatality payouts directly into the tax-free retirement plan, but few take advantage.

Labor's Alexander Acosta and SEC's Jay Clayton tell lawmakers they will work together on fiduciary rule

In separate appearances before Senate panels, the regulators stressed the cooperation that Republican legislators and opponents of the DOL fiduciary rule are demanding.

Brian Block denies cooking the books at Schorsch REIT

Former CFO claims everything he did was 'appropriate' and 'correct.'

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print