Best Execution: What It Is and How to Document It

“Best execution” is a key fiduciary obligation for investment advisers. It refers to your duty to seek the most favorable terms reasonably available when executing client trades. While cost is a major factor, it’s not the only one.

The SEC expects Registered Investment Advisers (RIAs) to continuously evaluate and document how they achieve best execution for their clients. Failing to do so can lead to examination deficiencies—or worse.

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### 🎯 What Is Best Execution?

Best execution means more than just getting the lowest price. Advisers must consider the full range of factors that affect the quality of trade execution, including:

- Price

- Speed of execution

- Likelihood of execution and settlement

- Size and nature of the order

- Broker-dealer capabilities

- Client preferences

Your duty is to evaluate whether the execution arrangement provides overall value—not just the best price at a single moment.

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### ⚖️ Fiduciary Duty and Best Execution

RIAs owe clients a fiduciary duty of care and loyalty. That means:

- Continuously assessing execution quality

- Selecting brokers based on client benefit—not adviser incentives

- Disclosing soft dollar arrangements or conflicts of interest

- Periodically reviewing broker-dealer performance

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### 🧾 Documenting Best Execution

1. **Broker Review Process**

- Maintain written policies on how brokers are selected and reviewed

- Include criteria like commission rates, execution quality, and research capabilities

2. **Soft Dollar Disclosures**

- Clearly disclose any soft dollar arrangements (e.g., research or technology paid through commissions)

- Ensure compliance with Section 28(e) of the Exchange Act

3. **Trade Review Logs**

- Periodically sample and review trades for best execution compliance

- Maintain logs and results from trade reviews or TCA (transaction cost analysis)

4. **Committee Oversight**

- Establish a best execution committee to review broker performance and policies

- Keep minutes from review meetings

5. **Client Communication**

- Disclose how you achieve best execution in Form ADV Part 2A

- Include any conflicts and the factors considered in execution decisions

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### 🚩 Common Mistakes to Avoid

- Using only one broker “out of habit” without periodic review

- Failing to compare execution costs across brokers

- Omitting soft dollar disclosures

- Not documenting best execution reviews

- Ignoring client preferences or restrictions

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### 🔁 Best Execution Is an Ongoing Process

Don’t treat best execution as a one-time policy. The regulatory expectation is that firms:

- Conduct regular reviews of broker arrangements

- Update policies when trading practices or markets change

- Document all assessments and decisions made

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### Final Thoughts

Best execution is about consistency, transparency, and putting the client first—not just cost. Regulators want to see that your firm is actively reviewing and documenting how you deliver value in execution.

By formalizing your best execution process and keeping strong records, you meet your fiduciary duty—and protect your firm during exams.