A number of EA developers and manual traders use managed accounts for marketing their trading strategy, which offers several benefits to the provider. Firstly, the support and a good portion of the customer administration will be eliminated. Moreover, instead of a single profit as a result of the sale, profits will be generated continuously- at least as long as the strategy is working. Additionally, the execution of manual strategies does not demand any programming know-how, thus no extra time is not needed for programming tasks.
At a first glance, this approach also appears to be beneficial for the client. Due to the absence of expert advisors and other programs, computers or an own VPS will not be required, and trades are executed automatically in the "Black Box" without any intervention by the client. However, some drawbacks which may not be quite obvious must not be forgotten. The client is bound by the broker's choice of provider, and he is not in a position to control the trading strategy which the provider may adapt or alter completely at any time.
Participating in managed accounts usually is for free, as the provider will receive a result based commission ranging typically from 20% to 35%. Particular attention should be paid to the use of the so called high-water mark method. In this case, a success related commission will be due only if a new high compared with the last invoicing cut off date has been reached, and the client will not be asked to pay a fee while only losses are compensated. Mostly it is the broker who will invoice the success commission by a direct debit to the customer account at the end of the month.
On rare occasions, models based on a so called hurdle rate are being offered, but usually this is the case only when the provider is thoroughly convinced of the success of the trading strategy offered. A hurdle rate of e.g. 5% implies that a commission fee will not be charged for the first 5% profit of each settlement period.
Unfortunately, the broker will often pay to the provider a share of the spread or of the commission earned on ECN accounts, it may even occur that the broker will charge a higher spread or commission specifically tailored for the provider's managed accounts at his particular request. Thus, the provider can earn a supplementary independently of the trading result.
Other fees, like fixed monthly commission or one time payments, e.g. in the case of the subscription to a managed account or the (early) notice of such an account, may be additionally agreed.
In most cases, the provider of a managed account will send to the prospective customer a special link for the account opening at the prescribed broker. Subsequently, this account will be barred from manual trading and can be used only for the purpose of managed accounts.
Usually, an account needs to be marked as a managed account already at the time of account opening. Most brokers will require a limited power of attorney (LPOA) in addition to the regular paper work. This power of attorney allows the broker to grant limited customer account access to the the provider of the managed accounts, the provider will be entitled to open and close positions, however, he cannot dispose of the funds on the account. The LPOA will also define any other pricing details and permit the broker to debit directly the customer account.
Some brokers offer the option to access directly managed accounts listed in the client area, this mostly requires only an online agreement to the risk acceptance declaration. However, in many cases these managed accounts are not professionally traded accounts, but rather accounts of other private clients, e.g. as you may find at Zulutrade.
In case of a MAM, the provider uses specific software, e.g. the MT4 multi account manager. This application allows merging an unlimited number of customer accounts into one single virtual master account; nevertheless, the trades are executed solely on each individual customer account and not on the level of the maser account. The user or expert advisor will not be able to differentiate between a virtual master account and a regular account. Individual trades are allocated to the customer accounts according to a fixed lot size, a percentage or the respective share in the virtual credit balance; some brokers cater for further allocation criteria.
The MAM provider basically controls the individual customer accounts and may e.g. exclude individual accounts from trading or execute trades only for particular accounts.
MAM and PAMM mainly differ in the administration method; the latter is fully administered by the broker. A PAMM provider can access only the virtual master account and needs to trade exclusively on this account. The results will be allocated to the respective individual accounts by the broker only after the execution of a trade is completed.
Any risks of a managed account result basically from the "Black box" feature of this type of investment.
Whenever a provider of a managed account receives a fee which is result independent, but depending on the trading volume, the potential for manipulation risks increases significantly. Let us assume that the provider uses a trend following system and expects an exchange rate movement of at least 150 pips. He has now the choice of opening a TP with 150 pips or a position with a TP of only 50 pips combined with two pending orders with a gap of 50 pips and a TP of 50 pips respectively. At a first glance, the result may look the same, however, in the second case the client will have paid three times the spread and possibly also three times the commission, which allows the provider to triple his profit without incurring any risk.
Also, the uses of drawdown phases need to be examined thoroughly. Unfortunately, it frequently occurs that managed account providers adapt their trading strategy frantically such as increasing the lot size and thus the risk, or accepting new trading pairs, or just leaving a position to it during a period of counter movements - having the objective in mind to present a fast turnaround to their clients. However, sometimes this particular activity may lead to a downward spiral which can trigger even more severe counter measures.
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