How Not To Lose All Your Money With A Managed Forex Account
How Not To Lose All Your Money With A Managed Forex Account
Managed forex accounts present a decent opportunity for those who don’t have the time to learn how to trade forex or enough time to actually trade their own forex account to still make some profits from the forex market. They also open up investors to the triple threat of scam, incompetence, and bad brokers.
The first problem is that there are plenty of managed account scams out there. In some ways, these are much worse than forex broker scams or forex product scams. Managed account scammers usually try to get victims to invest as much money as possible, even their entire life savings. Sometimes they suggest taking out a mortgage on the victim’s house or securing other loans so that even more money can be invested. Falling for this kind of scam can ruin your entire life. As if this wasn’t bad enough, even a legitimate forex account manager can still wipe out your account through incompetence.
To avoid the most common managed account scams, you first must learn to differentiate between a normal managed forex account and a pooled account. In a normal managed forex account, the account is in your name, and the money goes from you to your forex broker. In a pooled account, you send your money to the account manager who is then supposed to pool the money from various clients into a trading account that the account manager controls.
Although there are legitimate pooled accounts under management, pooled accounts are MUCH more susceptible to fraud. Anyone with a computer can create fake account statements.
With a pooled account, you can’t ever be sure where your money is. Many of these types of accounts guarantee a large monthly return on investment. There is no such thing as a true guaranteed high percentage return on investment in forex, and anyone offering one is 98% likely to be a fraud. The other 2% of the time, the person is merely an over-enthusiastic idiot.
Either way, kiss your money goodbye.
But wait! You have a friend who invested and has been getting checks for the guaranteed 10% monthly return on their investment every month for over a year now. It must be legitimate.
I’m sorry, but what you’ve just described is almost guaranteed to be Ponzi scheme, named after the very infamous Charles Ponzi. It works like this:
The account manager gets one person to invest. The amount of money doesn’t matter. Returns of anywhere from a few percent per month to 20 or even 30% per month are guaranteed. Here’s the good part. NONE of the money is ever invested in the forex market. If the account manager promises 10% per month, the money can be hidden in a mattress and the payments maintained for 10 months. You might think this is a foolish way for the manager to make money, but it isn’t.
He tells his first victim that by reinvesting half (or more) of that 10%, the account will grow faster. Next, he tells the first victim that if the total amount in the account is increased, the guaranteed percentage of return can also be increased.
Of course, this deal is so great that many people will tell their friends and family about it. Some of these account managers will even offer incentives to customers who refer other customers. As long as more money from the existing clients as well as from new clients keeps coming in faster than money is paid out, the account manager doesn’t have to waste one second of his time risking money in forex trades.
A well run Ponzi scheme can go on for several years, even while paying pretty good returns to investors. The problem is that the moment there’s any significant drop in new investment, the whole thing will collapse very quickly, that is if the scammers don’t decide to take the money and run even sooner.
Back to our example above where your friend was telling you all about those 10% monthly returns. Ask your friend if he or she has invested even more money since starting to take advantage of the high returns. Ask how many others have signed up based on your friend recommending this miraculous account manager. I’ll bet you a fist full of pips that your friend has not just been throwing more money in, but has also been recruiting others.
Even worse, sometimes, these Ponzi-style scammers don’t even bother to pay out money.
Instead, they’ll try to get you to reinvest it all, or offer much higher rates of return with an automatic reinvestment plan. When the time comes to withdraw some of the money, there will have a be a pile of wildly varied excuses for delays in transferring funds, combined with more concerted efforts to try to lure the victims into putting even more money in with offers of better returns in the future. Of course, in this "Ponzi with no payout" scenario, the only ones getting any money are the scammers.
Within the United States, there is one very obvious warning sign of large-scale financial fraud of this sort. Using the US Mail for fraudulent purposes brings a whole lot of additional investigation and extra criminal charges. Sure, it’s nice of the company to use an expensive overnight courier service to deliver important documents, but every legitimate financial company I’ve ever dealt with in the USA sends at least some items by postal mail.
If a company absolutely refuses to ever use the post office for even minor items, it almost inevitably means that they are trying to avoid a mail fraud charge.
Another GIANT red flag is if the managed account company only accepts some form of e-currency (excluding PayPal – they do try to investigate scam and fraud claims, many others don’t).
Managed forex accounts often involve very large sums of money. You aren’t buying a product. You are loaning them YOUR money to invest.
If a managed forex company refuses to accept a check or even a wire transfer, this means that you have no way to know what bank all of your money is going into, or even what country it’s going to. If you want to spend $200 on an EA, you don't really need to know where someone's bank is. If you are investing your life savings, you do.
Even if a pooled account does not offer guaranteed returns, it is still a risky investment.
You are placing all of your money into the hands of an account manager.
Even if the manager is legitimately trading forex and is very skilled, you are counting on this person to not make some kind of colossal mistake with your money.
Considering the risks, I would never recommend investing in a pooled account without having an incredibly extraordinary amount of proof that the company is legitimate and the account manager is an amazing forex trader who always follows strict risk management rules.
Even then, all it takes is for the good account manager to give into temptation, and all the money can disappear in a day.
OK, so if you’ve taken my advice and decided to avoid pooled accounts, does this mean your money is safe? Not quite.
A normal managed forex account keeps YOUR money in YOUR forex account with a forex broker.
You will sign a Limited Power of Attorney (LPOA) granting the account manager the right to trade your account, and have a contract specifying how the account manager gets paid. You will be able to login and see exactly what trades are being placed and what your balance is in real time.
This is good, but there are still some serious issues to consider. Do not just give your account number and password to someone or some company without having a contract and signing an LPOA. They might not be able to take money directly out of your account, but they can still send you on a one way trip to a margin call.
There are three ways your account manager can get money out of a normally managed forex account.
The first two are obvious.
The account manager (or account management company) may charge a flat fee every month and/or a commission based on the profits of the month, and these will generally be taken directly from your account as specified in your contract and LPOA.
Either or both of these can be legitimate, and should be clearly disclosed in advance. The third way can turn even a good account management system into a ravenous beast that will eat away at your profits and maybe even your principal.
The third way that an account manager can get money out of your forex account works like this.
Some account managers will only manage your account if you sign up through them with their preferred forex broker(s). This usually means that the account manager is also acting as an IB of that broker and getting a cut of the spread or commission charged by your forex brokerage for every trade made in your account (whether by you or by your account manager).
The result is that more trades equals more profits for the account manager, whether you profit or not.
Under these circumstances, a lot of account managers will make many more trades solely to gain these commissions on spread.
In the stock market, this activity is called churning the account. There are some legitimate account management firms that do only trade accounts that they are IBs for, but you need to be aware that the temptation to churn your account will always be there in these cases.
If you decide to go with such a forex account management company, discuss carefully with them about how many trades and how big of trades they will place in a typical month. The other drawback to this arrangement is that it restricts your ability to choose a forex broker that is good for any other forex trading needs you might have.
It also means that you might get a good account manager, but be stuck with a poor forex brokerage that greatly reduces the profits that should be coming into your account.
Back to the monthly fee and commission on profits: Some companies charge only a monthly fee, others charge a percentage of your monthly profits, and others charge both. If the monthly fee is too high, it will eat all your profits (if there are profits). If the percentage of the monthly profits is too high, what’s the point of making any profit? Make sure that any percentage of monthly profit is based on the “high water mark” for your account.
This means that if your account drops in value, the account manager doesn’t get a percentage of any new profits until all prior losses are made up and a new higher total amount of money in your account is reached.
What would reasonable fees be?
That depends on your account, the skill of your account manager, and your investment objectives. If you have a $10,000 account and are charged $500 per month by your account manager, then that manager needs to average more than 5% gains per month or you will be losing money.
On the other hand, if you had $50,000 in the account and still only paid $500 per month to have it managed, then the account only needs to exceed 1% average monthly return to keep gaining in value.
For commissions on profits, I haven’t looked at too many managed forex companies, but have seen rates ranging from less than 25% to as over 50%. If the account manager can average significantly more than twice the returns you can get by yourself, then 50% might be reasonable. Otherwise, it’s too much. The calculations get more complicated if you get charged a monthly fee and a percent of profits.
For forex managers who charge a monthly fee, ask if the first month can be a free trial. Also, ask if they waive the fee if there are no profits for one or more months. You are paying them the fee to make profits, not to use your account to practice trading.
Any legitimate trader will have occasional drawdowns, but there should be no reason to pay a fee if the drawdowns stretch over several months. Of course, you already know you should get any promises about fees in your LPOA and contract.
If the forex management company is in the US, ask if they are registered with the NFA and the CFTC. For the most part, this is a requirement, but there are a few loopholes to this rule. I would definitely suggest avoiding any US company that isn’t listed with the NFA and CFTC.
Verify this by going to the NFA and CFTC websites to check that they are registered, do they have any complaints, and is the registration active or not. DO NOT trust the link from the managed account company’s website – it could be designed to take you to a faked version of the real websites.
Wow! I was almost done editing this article and got a message from a friend about a managed account company that showed how safe it was because it was registered with the Securities and Exchange Commission. I had to look very closely at the certificate they displayed to see it was the SEC in the Philippines, not in New York.
For other countries, check the regulators closely.
One of the most recent FPA Scam investigations was of a company that also listed a regulator’s website.
That site was for a regulatory body that did not exist and only was there to appear to prove that the company was registered. Check the regulators website carefully. How many companies do they claim to regulate? If it’s only a few, that would make me suspicious that the regulator is fake
Are there any signs of any enforcement actions against any company? If not, the regulator may be real, but lack any authority to do anything.
Run a web search on the regulator and see how many links you get. Any real regulator should have quite a few, and some of them should be from websites belonging to the government in the country it’s based in.
So, you’ve avoided pooled accounts, found your own broker (possibly by using my method of broker selection), verified that the account manager or account management company is properly licensed and regulated, and has no major complaints filed with regulators.
Do you feel safe? You are definitely safer, but you aren’t done yet.
Incompetence can erase your forex account balance just as quickly as fraud. Before signing that LPOA, make sure you understand the concept of risk management and discuss how the account manager will control risk.
See if you can get a contract that specifies the maximum risk per trade along with the maximum total risk to be taken at any time. This should at least give you some legal leverage if your account is severely drawn down by improper risk management.
Even then, login and check your account every few days, if not more often. Your excellent manager might go on vacation and the person who substitutes might not be nearly as good.
Of course, you should have already checked FPA’s Managed Forex Reviews and done a web search on the account management company and/or account manger that you will be dealing with. Remember that a lack of negative information on the web is NOT the same as an endorsement.
The scam may be fairly new, so no one may have complained yet. Be wary if the website shows average returns going back years before the website was registered and ask questions about this. Of course, clever scammers may sit on a domain for an extended period or buy a domain that has been parked for years, just so their Whois records will seem properly aged.
When searching for information about the company on the web or in regulator websites, be careful if the names don’t quite match.
A company called Perfect Acccounts, Inc may not or may not turn out to be the same company as Perfect Accounts, LLC or Perfect Accounts,Co. Legitimate forex companies often have similar names, and scammers will sometimes try to get a name that’s as close to a legitimate company name as possible in order to borrow some legitimacy.
Lately, I’ve come across some websites that provide comparison information about managed forex account companies. This looked a very useful service, until I checked one of them and found that all the forex account management services listed on the site offered referral fees.
There may be some good comparison sites out there, but be aware that others are not there to do anything other that refer you to the company that pays them the highest fee for new client referrals.
If you want to invest your money in a managed forex account, be careful! Investigating before investing will take you a lot of time and effort. Then again, earning all of that money you want to invest also took you a lot of time and effort.
Before you tell me that it’s too hard to check out a forex account manager or a forex management company, take a moment to imagine what you would do if your entire investment disappeared, either due to fraud or incompetence. Then come back and tell me if my suggestions are too much effort for you.
If you are really thinking about putting your life savings into an account with someone based on them having a nice site on the internet or because your third cousin’s friend told you about them, either do the thorough investigation yourself or consider that it might be well worth hiring a professional investigator to check things out before placing hundreds of thousands of dollars under the partial or complete control of a stranger.
PLEASE do not ask me to recommend a forex account manager to you.
I trade my own account and have never used one (but I might think about giving one a try in the future– if I see a solid track record with no hints of fraud).
The reason I know enough to write this very basic article about this type of fraud is that I’ve traded stocks for many years before coming to the forex market.
Additionally, my father used to be a stockbroker, and I got to overhear tales of investment fraud that were truly amazing (no, he wasn’t the criminal in those stories, or at least he never confessed it when I was listening).
The types of fraud found in forex managed accounts are pretty much just repackaged versions of frauds found in the stock market and other trading markets.
I also did some more digging around the web after writing about the forex account manager who got a nine year sentence for forex fraud and reading the FPA’s Scam Finding against the Forex Project of Luis Rivas to fill in a few more details about the subject.