March 12, 2015
Lately, investment management firms are subject to intensified scrutiny of their trade execution practices, and a recent Cutter Associates Benchmarking survey on Execution Management revealed specific areas where firms could improve their practices.
Investment managers have a fiduciary responsibility to seek the best execution for their clients’ trades, and they need to be ready to answer increasing requests for transparency into their trading practices. They must have well-defined and measurable execution practices in place to effectively monitor their in-house traders, external brokers, and trade executions. While firms have always closely monitored their external brokers, the Cutter survey revealed that they could improve the monitoring of their in-house traders.
- Because it is assumed that traders perform better when they are held accountable for their performance, 90% of firms participating in the study hold traders accountable in some way for their trade executions, for example through transaction cost analysis (TCA) with periodic performance reviews. Among the participating firms, 21% share trader performance reviews with a Best Execution committee.
- While 77% of participating firms use TCA to evaluate external broker performance, only 53% use TCA to evaluate the performance of their in-house traders.
Also, given the fiduciary obligations around best execution, all investment management personnel should understand the firm’s policies and responsibilities in this area. But among the firms surveyed, only 21% provide mandatory, annual best execution training for all investment management personnel.
“Both clients and regulators are closely scrutinizing execution practices,” explained Mary Storrs, Principal and Head of CutterBenchmarking. “Firms providing regular, mandatory best execution training to everyone in the front office, not just the traders, ensure that all investment management personnel are accountable for understanding and adhering to the firm’s best execution policies.”
The full survey covered best execution policies and oversight, TCA, broker management, commission management, trader roles and accountability, and trading technology. Participants received commentary on the overall survey findings and a full analysis comparing their firm’s capabilities against other participants in the study and ranking them against the Cutter Associates’ Capability model. More information on the Cutter Associates Benchmarking service is available here.
About Cutter Associates, LLC
Cutter Associates, LLC serves the operational and technology needs of the global asset management industry, providing clients the tools and services they need to be successful. By leveraging multi-faceted expertise and an unrivaled knowledgebase, Cutter Associates provides clients truly independent research, exclusive member-only events, custom operations benchmarking, and a global consultancy for strategic advice on and delivery of operational and technology excellence. Cutter Associates works with the world’s leading asset managers, providers and servicers. Headquartered in Hingham, MA, Cutter Associates has subsidiaries in Canada and the UK, and is on the web at www.cutterassociates.com