What are the features of ‘Best Execution’ vs ‘Execution-Only’?
One area where we’ve found CII R01 and CF1 candidates have struggled in the past, is being able to identify the differences between ‘best execution’ and ‘execution-only’. In this blog post, we review both of these services so that you’ll be able to distinguish between the features of each of them.
We start with best execution.
In short, best execution is the obligation of an authorised firm to execute orders on terms most favourable to the client. It mainly applies to firms in relation to their dealings in stocks and shares on behalf of their clients.
The Financial Conduct Authority (FCA) states that a firm must take all sufficient steps to obtain the best possible results for its clients, taking into account the execution factors.
The execution factors are:
- likelihood of execution and settlement;
- nature; or
- any other consideration relevant to the execution of an order.
Best execution means delivering the best possible result for the individual client, bearing in mind their particular needs. It’s not a ‘one size fits all’ solution. So, while it generally means purchasing at the lowest price for buying clients and selling at the highest price for selling clients, we can see from the list of execution factors that price is not the only criterion. For example, for some clients, the speed of the sale may be more important to them than the price.Learn the differences between 'Best Execution' and 'Execution-Only' - perfect reading for your #CII R01 or CF1 exam revision. Click To Tweet
Despite the similarity in the term, execution-only is a completely different concept to best execution.
The FCA defines an execution-only transaction as:
‘one executed by a firm upon the specific instructions of a client where the firm does not give advice on investments relating to the merits of the transaction and in relation to which the rules on assessment of appropriateness do not apply.’
In essence, with execution-only the client tells the firm what it is they want and does not ask for or receive any financial advice. For example, if a client states they would like to invest £20,000 in Vanguard’s Global Equity Fund.
In this instance, there is no obligation on the adviser to conduct a fact-find or to follow the suitability rules. Their role is essentially reduced to organising the paperwork for the client so that they can purchase the product concerned.
One downside of execution-only is that the client does not have recourse to the Financial Ombudsman Service (FOS) in the event that something goes wrong. This is because they have not received financial advice.
The rules apply to ‘non-complex’ investments, e.g. straightforward investments into shares, bonds, unit trusts, and OEICs. If the investment concerned is deemed to be ‘complex’, e.g. it involves derivatives, then the firm would be required to assess the appropriateness of the transaction for the client.
In summary, best execution relates to the manner in which a transaction is carried out (i.e. on terms most favourable to the client), whereas execution-only relates to the advice (or rather the lack of) received in relation to making an investment.
Grab the resources you need!
If you’re studying for your CII R01 exam, and you’re wanting a feeling of confidence on exam day, grab our free taster to try out one of Brand Financial Training’s resources for yourself. Click the link to download the R01 mock paper taster now!
Alternatively, you can download the taster for CF1 if you’re studying for that exam.