Trade errors at a small RIA: how to correct them and what to record
A trade error is a trade that doesn't match what was intended: the wrong security, quantity, account, direction or price instruction. When one happens, a small RIA should stop and confirm the facts, correct it promptly with the custodian, make sure the client is put back where they would have been, decide how any loss or gain is handled under the firm's written policy, and record each step. A common principle is that clients shouldn't bear the cost of the firm's mistakes.
The rebalance was meant to sell 200 shares in a client's taxable account. It sold 2,000, in their IRA. Nobody noticed until the confirmation came through the next morning. What happens in the next few hours decides whether this is a footnote or a problem.
What counts as a trade error?
| Type | Example |
|---|---|
| Wrong security | A similar ticker entered by mistake |
| Wrong quantity | An extra zero |
| Wrong account | The trade placed in the spouse's account |
| Wrong direction | A buy entered as a sell |
| Missed or duplicate trade | An instructed trade never placed, or placed twice |
| Wrong model applied | An account rebalanced to a model it doesn't follow |
A trade that lost money because the market moved isn't an error. A trade that didn't match the instruction is.
What are the steps?
- Stop and confirm. Compare the trade with the instruction, the model and the account. Place a hold on further trading in the account if needed.
- Correct it promptly with the custodian, following their error process.
- Work out the effect. Compare the account with where it would have been without the error.
- Apply your policy on who bears any loss and what happens to any gain.
- Tell the client as your policy requires.
- Fix the cause so the same mistake is harder to make.
- Record it.
A worked example
Take a hypothetical two-person RIA. During a rebalance, the operations assistant enters a sell of 2,000 shares instead of 200, in the client's IRA instead of their taxable account. The adviser spots it on the next morning's confirmations.
| Step | What the firm does |
|---|---|
| Confirm | Checks the rebalance instruction: 200 shares, taxable account |
| Hold | Places a hold on both accounts until corrected |
| Correct | Works with the custodian's error desk to reverse and re-place the intended trade |
| Effect | Compares the IRA with where it would have been; any loss is covered under the firm's policy |
| Client | Calls the client, explains, confirms in writing |
| Cause | Adds a second-person check on any trade over a set size |
What should the record show?
- When the error happened and when it was found, and by whom.
- The intended trade and the actual trade.
- The correction, with dates and the custodian reference.
- The financial effect and how it was handled under the policy.
- Client communication.
- The cause and the change made.
When is this overkill?
It isn't. A firm that never has trade errors still needs a short written policy, because the first one shouldn't be the moment you decide who pays.
How Advorra fits
Advorra's trade blotter ties each trade to the strategy it implements and has an exception queue, trade holds can stop an account from trading while something is fixed, and the incidents log records what happened. Trade execution stays with your custodian. See the product page, or read the trade blotter and the complaints and incidents log.
One thing to do this week: check that your written procedures say who bears the cost of a trade error and what happens to a gain.
An operations guide, not legal or compliance advice. Your trade error policy and compliance consultant decide what your firm does.
Questions advisors ask
Who pays for a trade error?
Your written trade error policy should say. A common principle is that the client should be made whole for errors the firm causes. Ask your compliance consultant how your policy should handle losses and any gains.
Do I have to tell the client?
Many firms tell affected clients, especially when the account was affected beyond a quick correction. Your policy should set the standard.
What if the error made money?
Your policy should say what happens to gains. Firms handle this differently, so decide in advance and apply it consistently.
Should trade errors go in a log?
Yes. A trade error log, or your incidents log, makes patterns visible and shows each one was handled.
Is this compliance advice?
No. It is an operations guide. Your trade error policy and compliance consultant decide what your firm does.
See it on a demo firm
Advorra is practice software for independent RIAs: clients, models, IPS, billing and compliance records in one place, on top of the custodian you already use. Built by The CollabHub.
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