What are Forex managed accounts?

Almost every Forex trader has the ambition to trade at a professional level.
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Almost every Forex trader has the ambition to trade at a professional level. It’s understandable. Trading professionally can come with big financial rewards. But to reach these levels – you’ll need to trade with other people’s money. This is where managed accounts come in. But what are Forex managed accounts? This article will explain everything you need to know.

Quite simply, managed accounts allow professional traders to legally trade on behalf of other people.

Think of managed accounts as an investment product. High-net-worth individuals often want to make a passive income from their capital. One way they can do this is by approaching a wealth management firm that offers managed accounts. Professional traders that work for the wealth management firm will then trade with the high-net-worth individual’s capital.

There are usually minimum requirements for a client to open a managed account. For example, many wealth management firms need a minimum deposit (from £25K to £250K).

In exchange for providing a managed account service, the wealth management firm will take a performance fee from any profits. This can range from 20% to 50% depending on the track record. Some will also charge an annual management fee. This can range from 1% to 3%, again, depending on the level of success the manager has enjoyed.

Power of attorney

One of the benefits of a managed account is that the client can keep their money in their own name.

For example, they often open a broker account and then deposit their funds. They then sign a ‘power of attorney’ document. This gives the trader permission to start placing trades onto that account.

The broker then oversees the agreement, deducting the trader’s fees from source. They can also assist in helping the client immediately terminate their managed account.

Some brokers even allow the client to keep their money in their actual bank account. It’s known as a custodian account. The broker then agrees a line of credit with the bank, so that they can access the account to deposit profits or remove fees.

The main purpose of the managed account structure is to provide security to the existing client.

They also allow new traders to develop a much more credible money management business.

What methodology do professional traders use?

Professional traders that offer managed accounts tend to use fundamental analysis. This strategy attempts to analyse real world events, before judging their impact on the price of currencies.

Why do traders use this methodology? It’s actually very simple. Events dictate movements in the financial markets. We just have to take a look at recent history to see this.

Brexit is an excellent example. Any trader worth their salt knew that a vote for ‘Leave’ was widely seen as being bad for the UK economy and for the pound. Above all, leaving the European Union would bring a degree of uncertainty to businesses and investors about the UK’s future trading relationships.

This proved true when the referendum results unfolded. The pound dropped to 31-year lows against the US dollar.

Technical analysis could not have predicted this kind of movement. In fact, I know very few professional traders that base their trading decisions on technical analysis.

How do I trade managed accounts?

To trade managed accounts, you need to be able to demonstrate your competency in Forex. Moreover, you’ll need to demonstrate this competency to potential high net worth investors.

Professional investors are scrupulous when sourcing traders, as they need to ensure their capital is in safe hands.

Specifically, you’ll need a verified record of profitability, showing consistent returns over at least a six month period. You’ll also need to explain your trading methodology in detail.

In addition, you should expect potential clients to question you on your risk management strategy. In particular, they’ll want to know what steps you take to limit exposure should the market move against your position.

As a trader, you also need to ensure that you have the appropriate permissions to trade other people’s money.

In the UK, FCA regulation is a legal requirement for every investment firm. Most developed economies across Europe, North America and beyond have equivalent regulatory bodies.

You also need to ensure your managed accounts programme is promising realistic returns. A programme that promises high yields in a short space of time indicates high risk. This will actually deter most professional investors. In my view, an annual return of 20% is a reasonable expectation to give clients.

Is trading managed accounts worth it?

This depends on the type of person you are.

Trading managed accounts can be a stressful experience. You need to accept that there will be times when you will lose your client’s money. This can be an uncomfortable feeling – especially when managing large amounts of capital.

Before committing yourself to trading managed accounts, take a look at your current mindset. When the market moves against you, how do you react? If you tend to panic, or feel stressed, it could be the case that you’re not ready to trade for other people.

However, if you’ve mastered your emotions and have a verified record of profitability – it could be the right time to try trading managed accounts.

The financial rewards of trading managed accounts can be substantial. In fact, many professional Forex traders opt to service managed accounts for just a few years.

Other downsides

There are other downsides to the managed account structure, especially for traders.

The main downside is that the performance isn’t technically theirs. Remember, the trades occur on an account in someone else’s name. Therefore, it is very difficult to obtain any credible audit of overall performance.

It doesn’t prove who actually traded the account at the time. The ‘power of attorney’ only shows that the trader had access to the account.

Theoretically, the client could have also placed trades to bolster profits. Alternatively, a different trader could have received the log-ins.

One solution is that the trader can simply audit the performance on their own account. But this presents another problem. Clients tend to allocate capital based on the volume of assets under management.

If the trader can only show an audit for a single account, then this will result in much lower allocations from clients. Ultimately, it takes far longer to build up AUM to a significant amount.

Client calibre and expectations

The quality of client can be much lower with the managed account model. Many clients are individual investors.

These individuals tend to have unrealistic expectations about managed account returns. They also tend to be much more involved in the trading process. For example, they often comment on each trade – or require explanations on a regular basis.

This can be extremely distracting during drawdown periods. These investors also tend to exaggerate the amount of risk capital they have available. It means that when losses occur the impact on them is far more serious.

This adds further pressure to the trader. Ensuring you don’t deal with retail clients is a key take away from this article.

My own experience

I have held prominent positions at various hedge funds and wealth management firms, trading the capital of clients.

Back in 2014, I became the Head of FX at an investment firm in London. I also helped structure their trader training programme.

My goal was simple – to train promising graduates into institutional level traders. It gave me some incredible insights on what it takes to become an employee at one of these firms.

In truth, it’s a very cut-throat industry. Only a few who participate in the training programme end up in employment. It’s an important reminder of the standards wealth management firms expect from their traders.

Here are the characteristics I looked for in a trader who wanted to service managed accounts:

  1. An exceptional understanding of fundamental analysis
  2. A comprehensive risk management strategy
  3. They kept composure in difficult moments
  4. They communicated their concerns quickly and clearly

Advice for clients

As a client, there are a few things you need to look for in a trader.

Your priority is to ensure the trader has a real performance track record. It is very easy to forge things like broker statements or even a letter of verification.

Even online journals, such as the popular Myfxbook platform, are open to manipulation.

The only credible way to verify a trader’s managed account performance is by viewing an audit from a professional and registered accountant.

Audits and regulation

Audits are credible because they ensure traders use real money and banks.

Accountants verify trades by requesting access to the tickets for each and every transaction.

If there is no evidence of the trade being executed in the real market, the auditor will not verify it as legitimate.

This level of checking goes beyond anything else that is available. Audits can be expensive. The cost ranges from between $5000 to $20,000, depending on the amount of trades and the complexity involved.

If the trader does not have an audit prepared, you can request to conduct a full audit of their account, using your own, trusted accountant (at your own cost). There is no reason for a trader to deny you this access.

Another feature that the trader should have is regulation. This ensures that they are adhering to laws designed to protect you. If they fail to adhere to those laws, then they are open to punishment and recourse.

Regulation is not equal. Every managed account trader or wealth management firm should have regulation in the country they reside.

Use a credible broker

As a client you should be working with a credible broker.

You need one which is fully regulated in a credible jurisdiction. Plus, they should not be a dealing desk or market maker.

Furthermore, you need written confirmation that the execution of your trades will be via STP. this removes any potential conflict of interest between your account and the broker.

Limit volume commissions and leverage

You need written confirmation that the trader will not receive commissions based on trading volume.

This is another possible conflict of interest between you and the broker. It means that the trader gets paid by the broker just for placing a trade. Win or lose the trader gets paid. What’s more, they also get paid more based on how big those trades are.

The trader should only make profits via performance fees or management fees. This motivates the trader to make profit over and above anything else.

To help eliminate risk, you can request that your broker limits leverage on your account. This will stop the trader entering large positions, even if they wanted to.

What are Forex managed accounts?

In summary, managed accounts allow professional traders to trade capital on behalf of other people. This service is usually rendered through a wealth management firm and often involves substantial amounts of money. It can be a stressful – but extremely rewarding (in the financial sense) experience.

I hope you’ve found this article useful. If you have any questions, please leave them in the comments below. I’ll do my best to reply to as many as I can.

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