How Important is the Broker?

bad broker weakest link ib business

If a chain is only as strong as its weakest link, why try to build a profitable Forex business on the wrong broker foundation?

A bad brokerage firm WILL destroy any good IB business. Take that to the bank.

Many new introducing brokers make the mistake of thinking that the best broker is the one who fattens the agent's pockets the most. In the prior section on IB compensation, we showed why the truth is clearly the opposite.

So what characteristics make a particular broker good to work with, from the point of view of the referring agent? In our opinion, most of the same characteristics that are important to the agent's clients (since the interests of the clients and the IB should be aligned for maximum business success). Here are some important traits a Forex broker should have:

Safety of Funds – Bigger Doesn't Mean Safer

safety of funds of a forex broker

Many forget that the biggest currency brokers still around today (mainly in the United States and in the UK) were part of the original group of "bucket shops" or "wolves dressed in sheep's clothing" that started the retail market-making revolution back in the '90s (see the earlier section on IB compensation for more information). These firms made so much money dealing and using unfair tactics and techniques against their customers for so many years that they became very large indeed.

Some of the largest of these original FX cowboys have fallen by the wayside, taking armies of investors, traders, and IBs down with them. A notorious example of these large brokerage fiascos took place when the biggest of the biggest went under, wiping out all Forex customers: the 2005 bankruptcy of REFCO, an NFA-member brokerage firm. More recently, MF Global (Man Financial), another NFA-member in the United States, made headlines when they filed for bankruptcy during the end of 2011. These firms were huge, yet their FX accounts got plastered, which proves that size means nothing when it comes to the safety of client money.

"But wait," you may add, "Weren't these firms members of the NFA and registered with the CFTC (Commodity Futures Trading Commission)?" To that we have to answer, "Yes," but that doesn't mean diddly-squat. Why? Because NFA (National Futures Association) membership does not provide any protection whatsoever to Forex customers if a brokerage firm goes under. 

But let's not put any words in the NFA's mouth. Let's see what the NFA has to say about this matter. As of November 2nd, 2011, their "Trading Futures, Options on Futures and Forex FAQs" page stated: "customers still may not be able to recover the full amount of any funds in their account if the firm becomes insolvent and there are insufficient funds available to cover the obligations to all of its customers." Now doesn't that just make you want to put all your clients under an NFA broker?

But wait, there's more. On page 15 of their "Trading Forex: What Investors Need to Know" publication, they also state: "In the event your dealer declares bankruptcy, any funds the dealer is holding for you in addition to any amounts owed to you resulting from trading, whether or not any assets are maintained in separate deposit accounts by the dealer, may be treated as an unsecured creditor's claim," which means that they can use your hard-earned money to pay off their creditors.

Feeling warm and fuzzy inside yet?

The reality of all this is as follows: If you want your clients' funds to be safe in the event the broker goes bankrupt, you need to choose a broker who goes out of his or her way to protect client money, a broker who doesn't try to hide behind the insignificant status of some registration or license that is misperceived as a source of protection or security (like in the previously mentioned REFCO and Man Financial examples). You need to be associated with a firm that structures its accounts with safety in mind. There are ways to do this. For example, using a trust account structure (like we use with our customers) is a very good way.

In conclusion, don't fall into the trap of thinking that your clients' money is safe in a well-known firm or under the umbrella created by the regulators of large governments. Look under the hood and assure yourself that your clients' money will be protected if the $%#! hits the fan. It's the only way you can assure yourself that all the time and hard work you dedicate to establishing and growing your introducing broker business will pay off.

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