What does "Best Execution" Mean?

Best execution is a term that is used to identify the policies and procedures that help to ensure that an investment broker is acting in the best interests of his or her client. Typically, this means making sure to secure the best possible price for assets that the investor wishes to sell, while also researching and identifying the best possible price for any investments that the investor wishes to acquire. In many nations, governmental regulations help to reinforce this idea of best execution, providing a platform for brokers and dealers to develop operational procedures that do protect the interests of the client.

In order to exemplify best execution in his or her dealings with clients, the stock broker will work closely with those clients to determine what types of activities would aid the investor in moving closer to the states investment goals. By being aware of what the client wishes to ultimately gain from the investment activity, it is easier to identify options that carry a degree of risk the investor is likely to consider reasonable in relation to the anticipated return. The broker goes further and takes steps to qualify the potential transaction in light of current and anticipated market conditions, making it possible to provide the client with the relevant data to make the final decision.

It is important to note that best execution does not prevent an investor from moving forward with a deal that the broker does not believe is in the best interests of that client. For example, if a broker is aware of potential events that would make the purchase of a particular asset more profitable for a client if the transaction were delayed by a few days, the concept of best execution would mandate that the broker advise the client to wait and explain the reasons why. Should the client choose to ignore the advice and order the execution of the transaction, the broker will do so or run the risk of losing the account. From this perspective, best execution often takes the form of providing clients with the best possible recommendation under the circumstances while still allowing the client the opportunity to make the final investment decision.

Best execution does not prevent investors from incurring losses from time to time. The losses may be due to sudden shifts in the marketplace that were not foreseen at the time the original order was placed, or be the result of the investor choosing to take a course of action that was not recommended by the broker. What best execution does accomplish is making sure that investors have the information needed to make investment decisions, including recommendations from brokers that are based on fact and a solid understanding of the marketplace.