Due diligence needs to be an important component for any investment adviser compliance program. As we discussed earlier, due diligence should not be limited to recommending investments, but must also be employed when recommending or using third party service providers. In our opinion, one of the most important, if not the most important, outside service provider decisions made by investment advisers are the selection of a recommended broker/dealer. In fact, many investment advisers require clients to use a particular broker/dealer. However, far too many investment advisers fail to perform adequate due diligence on this important selection. We hear from many investment advisers that they fully understand broker/dealer best execution reviews are expected, but are not completed because of reasons such as (1) the broker/dealer they work with is large and reputable, (2) the investment adviser only selects mutual funds so best execution doesn’t matter or (3) the differences between broker/dealers are so slight that due diligence is unnecessary. Because of these reasons and others such as time and cost constraints, broker/dealer best execution reviews and due diligence is a matter often neglected by investment advisers.
February 02, 2007
As an investment advisor, your firm has a fiduciary duty to attempt to achieve best execution for your clients. This means an advisor firm must execute transactions for clients in a manner that the clients’ total costs or proceeds in each transaction are most favorable under the circumstances. This obligation is something that should be made part of your firm’s annual assessment of its policies and procedures. While RIA Compliance Consultations recommend on-going reviews of broker-dealers used, it is important to conduct at least an annual best execution and due diligence review of all broker-dealers that the advisor directs client trades. This is true for those advisor firms that use only one or two recommended broker-dealers. It is also true even when using a large, reputable broker-dealer such as Fidelity, Fiserve, Pershing, Schwab, or TD Ameritrade.