As fiduciaries, investment advisers are obligated to seek the best execution when trading for clients. Best execution is more of a process driven by sound policies and procedures, than it is a single data point. Advisers need to create an environment that is compliant with qualitative processes while considering trading factors such as price, commission, trade liquidity, timeliness, clearance, proper execution venue, crossing networks, direct order routing, algorithms or alternative trading systems, ECNs, dark liquidity pools, settlement, and risk associated with counter parties.
While best execution is the responsibility of the investment adviser, the custodian should be an ally and support the adviser through this process. The conflict of interest unfortunately lies in the trading environment provided by the custodians. As a collective whole, the custodian lacks the resources and interest to meaningfully provide the best execution environment for an adviser. There are a wide variety of investment advisers with a bounty of strategies which, all together, make it very challenging for a custodian to provide the best execution for every trade.
The best solution is for custodians to allow advisers the option to pursue an external trading partners. Today, the majority of advisor custodians impose excessive fees, such as $20+ per transaction for a trade away. These costs have severely limited the advisers’ flexibility to seek best trade execution. It is an arcane policy that empowers custodians to retain transaction fees from advisers.
The great news is there is a viable solution for advisers looking to enhance their trading environment. Recently, custodians have succumbed to the mounting pressure of critics and have begun to explore ways to avoid excessive fee policies on a case-by-case basis driven at the request of the adviser. Custodians do not tout this option since it encourages advisers to seek alternative trade execution providers. Best execution without the excessive fees is a win for advisers and a win for their clients.
Please contact BlazePortfolio for more information about trade away fees and best trade execution.