How To Avoid Losing Your Entire Investment With A Managed Forex Account
How To Avoid Losing Your Entire Investment With A Managed Forex Account

Those who don't have the time to learn how to trade forex or enough time to trade their own forex account can still profit from the currency market by using managed forex accounts. Investors are also exposed to the triple threat of scams, incompetence, and unscrupulous brokers.

The first issue is that there are several managed account scams to be found. These are, in some ways, far worse than forex broker or forex product scams. Scammers that use managed accounts try to persuade victims to invest as much money as possible, sometimes even their whole life savings. They may recommend taking out a mortgage on the victim's home or obtaining other loans in order to invest even more money. This type of scam has the potential to wreck your entire life. Even a legitimate forex account manager can wipe out your account due to incompetence, as if this wasn't horrible enough.

You must first learn to distinguish between a typical managed FX account and a pooled account in order to avoid the most common managed account scams. In a traditional managed forex account, the account is in your name, and funds are transferred from you to your forex broker. In a pooled account, you give your funds to the account manager, who is then responsible for pooling funds from numerous clients into a trading account under the account manager's management.

Despite the fact that there are valid pooled accounts under supervision, they are MUCH more vulnerable to fraud. Fake account statements can be created by anyone with access to a computer. You'll never know where your money is in a pooled account. A high monthly return on investment is guaranteed in many of these types of accounts. In forex, there is no such thing as a truly guaranteed high percentage return on investment, and anyone who claims to have one is almost certainly a con artist. The other 2% of the time, the individual is simply an overly enthusiastic idiot. Kiss your money goodbye in either case.

But hold on! You have a friend who invested and has been receiving checks for over a year now for the guaranteed 10% monthly return on their investment. It has to be legal.

Sorry, but what you've just described is nearly certainly a Ponzi scheme, which was named after the notorious Charles Ponzi. This is how it works:

One person is persuaded to invest by the account manager. It makes no difference how much money you have. Returns ranging from a few percent per month to as much as 20% or 30% per month are assured. Here's where it gets good. ZERO of the funds are ever invested in the foreign exchange market. If the account manager offers a monthly return of 10%, the funds can be stashed in a mattress and the payments made for a period of ten months. You would believe that this is a blunder on the manager's part, but it isn't. He convinces his first victim that the account will grow quicker if he reinvests half (or more) of the 10%.Then he tells the first victim that the guaranteed % of return can be enhanced if the entire money in the account is increased. Naturally, many individuals will inform their friends and relatives about this fantastic price. Clients who refer other customers may be offered incentives by some of these account managers. The account manager doesn't have to squander a second of his time risking money in forex trading as long as more money from existing and new clients keeps coming in faster than money is paid out.A well-run Ponzi scheme can survive for years, even if it pays out decent returns to investors. The concern is that if there is a large decline in new investment, the entire scheme will collapse very rapidly, assuming the scammers do not decide to grab the money and flee even sooner.

Returning to our previous scenario, your acquaintance was informing you about the ten percent monthly returns. Inquire if your acquaintance has increased his or her investment since beginning to take advantage of the excellent returns. Inquire about how many other people have signed up after hearing about this extraordinary account manager from a friend. I'll bet you a fistful of pips that your friend has been not just putting more money in, but also recruiting others.

Worse, these Ponzi-style con artists don't always bother to pay out money. Instead, they'll try to persuade you to reinvest it completely or to set up an automated reinvestment plan with significantly higher rates of return. When it comes time to withdraw part of the monies, there will be a slew of excuses for delays in transferring funds, as well as more concerted efforts to get the victims to put even more money in with promises of better future returns. Of course, in this "Ponzi with no payoff" scenario, the scammers are the only ones who profit.

There is one extremely evident warning indicator of this type of large-scale financial crime in the United States. Using the United States Postal Service for fraudulent reasons triggers a slew of additional investigations and criminal accusations. Sure, it's great of the company to send vital documents by an expensive overnight courier service, but every genuine financial organisation I've ever worked with in the United States sends at least some goods via postal mail. If a corporation refuses to use the post office for even modest products, it is almost certain that they are attempting to avoid being charged with postal fraud.

Another HUGE red signal is if the managed account provider only accepts e-currency (with the exception of PayPal, which does investigate scam and fraud claims, but many others do not). Large sums of money are frequently involved in managed FX accounts. You are not making a purchase. You're lending them money to invest with. If a managed forex company refuses to take a check or even a wire transfer, you have no way of knowing what bank or even nation your money is going to. You don't need to know where someone's bank is if you want to spend $200 on an EA. You do if you're investing your life savings.

Even if a pooled account has no guarantees, it is still a dangerous investment. You're putting your entire financial future in the hands of an account manager. Even if the manager is a qualified forex trader with a lot of experience, you're banking on him or her to not make a huge error with your money. Given the hazards, I would never recommend investing in a pooled account unless you had a massive amount of proof that the organisation is authentic and that the account manager is a fantastic forex trader who adheres to rigorous risk management guidelines. Even still, all it takes is for a good account manager to succumb to temptation, and all the money might go in a single day.

So, if you followed my advice and avoided pooled accounts, does it guarantee your money is safe? That's not the case.

A standard managed forex account maintains YOUR money in YOUR forex broker's account. You'll sign a Limited Power of Attorney (LPOA) allowing the account manager to trade your account, as well as a contract outlining how the account manager will be compensated.You'll be able to check in and observe in real time what deals are being made and what your balance is. This is positive, but there are still some important concerns to be addressed. Do not reveal your account number and password to anyone or any company without first signing an LPOA and signing a contract. They may not be able to withdraw funds from your account directly, but they can still put you on a one-way journey to a margin call.

A routinely managed FX account can be withdrawn in three ways by your account manager. First and foremost, the first two are self-explanatory. The account manager (or account management business) may charge a monthly flat fee and/or a commission depending on the month's profits, both of which will be deducted from your account as indicated in your contract and LPOA. Either or both of these scenarios could be legitimate, and they should be disclosed upfront. Even a solid account management system can be turned into a ravenous beast that eats your profits and possibly your capital in the third method.

The third method by which an account manager can withdraw funds from your forex account is as follows. Some account managers will only manage your account if you join their chosen forex broker through them (s). This usually means that your account manager is also a broker's IB, earning a cut of the spread or fee charged by your forex brokerage for each trade you make in your account (whether by you or by your account manager).As a result, whether you profit or not, more trades equals more money for the account manager. In these conditions, many account managers may place many more transactions just to benefit from the spread commissions. This is known as churning the account in the stock market. Although there are some reputable account management firms that only trade accounts for which they are IBs, you should be mindful that the temptation to churn your account will always be present.If you want to work with a forex account management firm, be sure to clarify how many trades and how large of trades they will do in a typical month with them. Another disadvantage of this arrangement is that it limits your capacity to choose a forex broker that meets your other forex trading needs. It also means that you might obtain an excellent account manager, but you'll be stuck with a bad forex brokerage that eats into your profits.

Returning to the monthly fee and profit commission: Some companies just charge a monthly fee, while others charge a portion of your monthly profits, and still others charge both. If your monthly cost is very expensive, it will eat up all of your profits (if there are profits). What's the use of making any profit if the percentage of monthly profits is too high? Make sure that any monthly profit % is calculated using your account's "high water mark." This means that if the value of your account falls, the account manager won't get a cut of any new profits until all previous losses have been made up and a new higher total amount of money in your account has been attained.

What are some examples of reasonable fees? That depends on your account, your account manager's skill, and your investing goals. If you have a $10,000 account and your account manager charges you $500 per month, that manager must average greater than 5% gains every month or you will lose money. If you had $50,000 in the account but only paid $500 per month to have it handled, the account would only need to earn a 1% average monthly return to continue to grow in value.I haven't looked at many managed FX companies in terms of profit commissions, however I have observed rates ranging from less than 25% to over 50%. 50% may be appropriate if the account manager can average much more than twice the returns you can obtain on your own. Otherwise, it's excessive. If you're paying a monthly fee plus a percentage of revenues, the math becomes more difficult.

If you hire a currency manager on a monthly basis, see if the first month is free. Also, inquire if they will waive the fee if no profits are made for one or more months. You're paying them to make money, not to practise trading with your account. Any legitimate trader will have drawdowns from time to time, but there should be no reason to pay a charge if the drawdowns last for months. Of course, you already know that any guarantees about costs should be included in your LPOA and contract.

If the forex management firm is located in the United States, inquire about their registration with the NFA and the CFTC. This is a must for the most part, but there are a few exceptions to the rule. Any US company that isn't listed with the NFA and CFTC should be avoided at all costs. Check the NFA and CFTC websites to see if they are registered, if any complaints have been filed, and if the registration is current or not.DO NOT rely on the link on the managed account company's website; it could lead you to a spoof version of the real website. Wow! I was almost through revising this article when I received a message from a friend about a managed account company that was registered with the Securities and Exchange Commission, indicating how safe it was. I had to examine the certificate very attentively to see that it was issued by the SEC in the Philippines, not the SEC in New York.

Check with the regulators in other countries. A company that listed a regulator's website was the subject of one of the most recent FPA Scam investigations. That website was for a regulatory body that didn't exist and was only there to prove the company's registration.Examine the regulator's website thoroughly. How many businesses do they claim to be in charge of? If there are only a handful, I'm sceptical that the regulator is a fraud. Is there any evidence of any legal action being taken against a company? If not, the regulator may be real, but he or she lacks the authority to act. See how many links you can find by doing a web search on the regulator. A true regulator should have a lot of them, and some of them should come from official websites in the country where it's based.

So you've avoided pooled accounts, selected your own broker (perhaps using my broker selection approach), double-checked that the account manager or account management company is fully licenced and regulated, and has no serious complaints lodged with regulators. Do you think you're safe? You're certainly safer, but you're not finished yet.

Incompetence, like fraud, can wipe out your forex account balance quickly. Before you sign that LPOA, make sure you understand the notion of risk management and talk to your account manager about how he or she will manage risk. Check to see if you can get a contract that specifies the maximum risk each trade as well as the total risk you can accept at any given time. If your account is badly depleted due to poor risk management, this should at least give you some legal leverage. Even so, log in and check your account at least once every few days, if not more. Your terrific manager may be on vacation, and the replacement may not be quite as good.

Of course, you should have already looked at FPA's Managed Forex Reviews and conducted a Google search on the account management firm and/or account manager with whom you would be working. Remember that a lack of unfavourable information on the internet does not imply approval. It's possible that because the scam is new, no one has yet reported it. If the website shows average returns from years before the business was registered, be sceptical and ask inquiries. Of course, astute scammers may stay on a name for an extended period of time or purchase a domain that has been parked for years only to make their Whois records appear older.

If the names don't exactly match when searching for information about the company on the web or on regulator websites, be cautious. Perfect Accounts, Inc may or may not be the same as Perfect Accounts, LLC or Perfect Accounts, Co. Scammers would sometimes try to get a name that is as near to an actual firm name as feasible in order to borrow some validity.

I've recently stumbled across various websites that provide comparison information on managed FX account providers. This appeared to be a great handy service until I looked into it and discovered that all of the FX account management services featured on the site charged referral fees. While there are some useful comparison sites out there, keep in mind that others exist just to refer you to the firm that pays them the most for new customer referrals.

Be cautious if you wish to put your money into a managed FX account. It will require a lot of time and effort to research before investing. However, earning all of the money you wish to invest took a significant amount of time and effort. Consider what you would do if your entire investment vanished due to fraud or incompetence before you tell me it's too difficult to check out a forex account manager or a forex management firm.Then come back and tell me if my suggestions are too difficult for you to implement. If you're serious about putting your life savings into an account with someone because they have a nice website or because your third cousin's friend told you about them, either conduct your own thorough investigation or consider hiring a professional investigator to check things out before putting hundreds of thousands of dollars under the partial or complete control of a stranger.

Please don't ask me for a recommendation for an FX account manager. I trade on my own account and have never utilised one (though I may consider doing so in the future if I see a respectable track record with no signs of fraud). I've traded equities for many years before coming to the forex market, which is why I know enough to write this very basic post regarding this form of fraud.Furthermore, my father used to be a stockbroker, and I was privy to some incredible investment fraud stories (no, he wasn't the criminal in those stories, or at least he never confessed it while I was listening). The sorts of fraud seen in forex managed accounts are essentially repackaged versions of stock market and other trading market frauds. After writing about the forex account manager who received a nine-year sentence for forex fraud and reading the FPA's Scam Finding against Luis Rivas' Forex Project, I did some additional digging around the web to fill in some more data regarding the subject.