Running a managed account business by referring investors to a money manager can be a lucrative endeavor for individuals and institutions.
In our industry, "Introducing Broker" or "IB" is the official term used to designate the entity or person who introduces the clients. To become a successful managed IB two things are required: a good source of investors and a well risk-managed program.
Good Source of Managed Account Investors
Without a source of clients, even the best products get lost on dusty store shelves. The key to making a managed account referral business work is having access to plenty of suitable investors. Ideally, the introducing party should have access to high net worth clients, as these are the ones who can allocate capital a lot faster; but this is not an essential requirement. With advancements in technology and how globally accessible forex has become to the everyday investor, the ability to invest millions of dollars is no longer essential to participate in managed FX. In fact, middle class investors of all walks of life can now invest with $10,000 USD or less at times. These regular investors usually have their portfolios extremely overweight in economically sensitive asset classes like stocks and bonds, as well as passively managed, long-only vehicles such as mutual funds that invest in practically the same things. Adding an uncorrelated asset class like managed forex to the mix might provide the "magic pill" that many of these traditional portfolios need.
Consequently, any person or company running a managed account business based on client referrals might not only be able to attain a very high level of success, but also be able to provide a much-needed, value-added service to investors. Of course, the key is having access to them.
Well Risk Managed Program
The biggest source of clients won't help an IB succeed if the investment programs the IB recommends are not very good. If an IB wants to maintain a successful, long-term business based on referrals, the money managers behind the program must use strict risk management at all times. Returns are important of course, but risk control is even more so. Too many client horror stories abound in the FX industry where poorly managed accounts have blown up due to rogue trading or poor risk management. In conclusion, IB's must do their due diligence and fully understand any managed program they're planning to recommend to their investors.
How Lucrative Can this Business Be?
Forex is probably the fastest growing asset class when it comes to managed money; but how lucrative is it for an agent or broker who wants to refer clients? The answer is "VERY" and an example will clearly illustrate this.
In the traditional investment world, most money managers charge investors 1 or 2% a year to manage client funds. Brokers or referral agents receive only a fraction of this fee. As a result, they need to raise a huge amount of assets to make a very comfortable living. To make the asset gathering process even more difficult, most of the traditional managed products do not outperform the market averages and carry a lot of risk as well, so they become a "tougher sell" for referring agents. In managed forex, on the other hand, a good manager normally aims for risk-adjusted returns that are superior to traditional products like mutual funds. As a result, managed FX becomes more attractive and easier for agents to sell. Furthermore, the fees involved are higher (typically between 20% and 50%) and charged as a percentage of the profits generated for investors. This means that the portion IB's receive is normally much higher than for traditional products that carry the minute management fees that were previously mentioned.
Sometimes, it is also possible for IB's to receive a portion of the commissions per trade or spreads charged by the brokerage firm where the accounts are managed. This transactional compensation is sometimes known as "rebates" and it is paid on top of the performance fee component mentioned above (see the explanations on this page for more information).
If you're interested in running a managed account referral business, please visit our IB section and complete our short form.