CFD Managed Account Services

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Advisory Account Trading

CFDs have a reputation as risky products, but what if you had your very own experts to advise you? Geoff Ho explains the benefits of a CFDs advisory account.

Imagine how much more profitably you could trade if you had your very own man or men in the City, people who would call you up offering you the latest hot trades, rumours and research. Not only that, but you could also go to your team of advisors and use them as a sounding board for the plays you are thinking of putting together. In some cases, your advisor could even pull you back from making a rash trading decision.

All of the above is available to those who sign up for an advisory account with a provider of CFDs (contracts for difference). Unlike those who use standard CFD execution-only accounts - which, as the name implies, will execute trades for their clients, nothing more - the users of advisory services get a whole range of extra benefits, which can be used to improve their trading.

And while CFD advisory services may initially cost a little more than their execution only counterparts, that cost difference becomes less and less important over time given the value of tips and the fact that CFD brokers love to negotiate on fees.

Clients have to qualify as 'Intermediates'

Before anybody can start trading CFDs via an advisory account, there are a number of hurdles that must be cleared. This is down to the Financial Services Authority (FSA), which has ruled that CFD firms must ensure clients qualify as 'intermediates' - that is, they have a certain amount of experience in the markets.

The rationale for this is simple: derivative products carry a high risk and the potential for heavy losses if anything goes wrong. To qualify for an advisory CFD account, clients need to demonstrate that they have the financial health, knowledge and experience to be able to handle using derivatives. Typically they should have access to £40,000 capital, although this sum will vary from broker to broker. It does not have to be available as one instantly-accessible lump sum - CFD brokers will accept a client as long as he or she has total income and savings equal to the threshold amount. For example, if a client has £20,000 in free cash and earns £20,000, that would be acceptable.

Similarly, the market experience required varies depending on the client's investment history. Generally, clients who only trade shares will be eligible for a CFD advisory account if they can demonstrate that they have made more than 36 share trades over a 12- month period or longer. Alternatively, if they have previously used other derivative products such as spread betting, customers can open an advisory CFD account if they have at least six months' trading experience and a minimum of 18-24 trades under their belt.

The other requirement is knowledge. To assess a potential client's suitability, brokers will either have face-to-face meetings or telephone conversations with individuals before quizzing them. While this may sound daunting the truth is that the questions clients are asked are very easy, with the likes of 'what is a stop loss?' being among the harder questions.

What to Expect

Those familiar with advisory stockbroking services should have a good idea of what to expect from an advisory CFD broker. But whereas stockbroking advisory services are more suited towards complete market novices, CFD advisory services are aimed at those who want to maximize their profitability and find new plays outside their usual markets.

Undoubtedly the most valuable thing a CFD advisory broker has to offer is regular trading tips - be they ones brought about through research or special situations, such as bid rumours. How traders receive these tips depends on the broker, but most will start off by sending tips to clients via email and then followed up by a phone call. However where fast, decisive action is needed from the client - such as a fresh bid rumour or a unforeseen market event - brokers will call their clients up immediately to ensure they can act in time to either make or save their positions.

The other thing to note about the tips provided by advisory brokers is that they normally contain a thorough explanation of why they are recommending any plays. According to City Index Advisory managing director Richard Cunningham, providing such explanations - along with charts, technicals and fundamentals - helps to educate clients and enables them to spot potentially winning trades in the future.

'Clients get well-considered market recommendations which includes the methodology we've used. We'll also give charts and an explanation of the trade. This is important because we know that clients do go back to the stocks they looked at in the past and may try the same play again. We try to educate our clients rather than just pull tips out of the air,' Cunningham says.

The education process is aided further by the fact that many brokers - be it over the phone or by email - take time out to explain to their clients why some of the trades they want to make are risky and what they can do to mitigate said risks.

'What we also do with our recommendations is state how risky we believe they are and why. We would then say to clients "do your normal trading size for regular trades but put say a third of what you would normally do on a risky trade",' says Blue Index managing director James Sanders.

'People sometimes just do not realise how much risk they are taking on at times. For example stocks like PartyGaming (PRTY) and 888 (888) are risky and I would be much more comfortable having a £10,000 position in BP (BP.) than either of them.'

How often and who initiates conversations between a client and trading desk is entirely dependent on the client's own preferences, according to Galvan Research and Trading analyst Andrew Gibson. If you want market updates and trading ideas from your broker over the phone at 9am sharp every morning, fine. Likewise, if you never want a broker to call you but still be available to take your calls, that can be accommodated too.

Advisory Services

But one of the key benefits of having regular contact with your CFD advisors is that they get to know what your preferences are and will tailor the advice, research and trades you receive to suit your individual circumstances.

'We deal with clients mostly on the phone - that way we get to know what the client wants,' says Gibson. Some clients are really into it and want to be called on a daily basis with updates or trades, but in general we speak to each client a couple of times a week. That said, some do call us every few hours.'

CFD brokers make vast quantities of information and tools available to their clients. Aside from charting packages, daily news updates and summaries, traders also receive research pieces on a number of markets - such as UK, US, European and Asian stocks, commodities, currencies and bonds - far more than a single individual could ever look at on his own.

A Sounding Board for Trades

Having someone to act as a sounding board or to question the logic of your trades is particularly handy and can dramatically cut down the number of bad trades you make.

All advisory CFD brokers assign new customers to specific individuals on their trading desks. Should a client want to contact said individuals, he will be given a dedicated phone line to reach them. Even if the designated contact is unavailable, clients' calls will always go through to another human being and not the dreaded voice mail.

'If a client calls and we don't pick up within three rings that call will be transferred and picked up by somebody else on the trading desk,' Sanders promises.

While it is in their interests to ensure that their clients trade frequently - after all, advisory CFD brokers make their money by charging commission on every transaction made by their clients - brokers will sometimes question the wisdom of their clients' trades and even try to talk them out of making them.

According to IG Markets investment manager Warren Firth, this works out for both broker and client. Clients avoid making bad losses and carry on trading, which of course means the CFD broker continues to make money from them.

'The hardest sell of all is to try to sell clients on the idea that they should not trade, which has been my advice all summer long because we've been in range-bound markets which can hurt people,' says Firth. 'I like to get people into trades when the market risk has diminished, which helps keep people out of the wrong trades. By doing that you develop better longterm relationships with your clients.'

Counting the costs

As expected, CFD advisory services do come at an additional cost. But given the willingness of brokers to negotiate with people on their preferred client list, that becomes less and less of an issue over time.

Those who use advisory CFD brokers will pay/receive interest at a rate linked to LIBOR on their positions, in addition to commission on all of their trades. This commission will vary from broker to broker and depend on what it is you are trading, although costs will typically range from 20 to 50 basis points.

Blue Index's Sanders says: 'We don't charge anything extra to clients for providing them with an advisory service. We provide them with everything and simply charge a commission.' How much commission you will pay for trades through an advisory CFD broker ultimately depends on what securities, markets, commodities you are trading. To get an idea of how commission charges for CFDs can vary, people need only look at IG Markets' website. While IG charges 0.15% commission for CFDs based on UK equities, that rises to 0.2-0.25% for European stocks and falls to 0.1% for Australian shares. Generally, the more liquid the underlying asset you want to trade, the lower the commission.

But if the idea of having to pay commission on the trades you make through an advisory service has you breaking into a sweat, fret not. Sanders says Blue Index and other CFD brokers are very willing to negotiate on this front with their preferred clients.

City Index Advisory's Cunningham agrees. He says that what determines how good client are is how often they trade, not how large their trading fund is. CFD brokers make their money from people trading, which means that even if a client is filthy rich, if he or she only trades twice a year, they will be classed as a low-yielding client and will not get preferential terms.

'If we have a large client we'll discuss terms with them,' Cunningham says. 'We reserve the right to negotiate with our clients - we're not rigid. It would be commercial suicide not to negotiate with good clients.'