Contracts for difference (CFDs) are great from the point of view of leveraging your money for potentially higher profits, but the downside of this is great exposure to loss. If you don’t feel you have sufficient time to properly research the opportunities, perhaps a CFD advisory service would give you the answer you need.
Imagine how better you could trade if you had your own advisory broker who would update you on the latest hot trade, rumours and research. But not only that. You can also consult your team of advisors and use them as a sounding board for the trades you are thinking of putting together. In some cases, your advisor could even pull you back from making a bad trade based on a rash trading decision.
With a CFD advisory service, you will get both technical and fundamental analysis and ongoing access to researched investment opportunities, together with access to experts you can discuss your ideas with. Unlike the usual execution only CFD account, the advisory service account will provide you access to a range of extra benefits, at a slightly increased cost.
Naturally, one the most valuable services that a CFD advisory broker is able to offer are trading tips, irrespective if these are based on market research or special opportunities such as a merger rumour. Usually most brokers will send those trading tips via e-mail and follow them up with a phone call but in situations where a quick decision needs to be taken by the client (say a bid rumour), brokers may call clients immediately to ensure that they are able to take advantage of the situation (or close-out their positions).
Opening a CFD Advisory Account
Before we are able to open an advisory account with your CFD broker, you must expect to be asked to prove your experience in the markets. This is a requirement of the Financial Conduct Authority (FCA) which requires your dealer to ‘qualify’ you. It’s just a due diligence measure for your own protection, because CFDs are derivatives which employ leverage, and which can therefore lead to large losses if things go wrong.
Thus, to qualify for an advisory CFD account, you will need to demonstrate that you have the financial resources, knowledge and experience to be able to trade derivatives. Typically, you should have access to £40,000 of trading capital, though this varies from dealer to dealer. You can make up this amount from both savings and your salary, so it’s okay to have £25,000 in savings and earn £15,000 per year, for instance.
To assess your knowledge, you can expect the dealer to ask you some questions, whether on the phone or in person. These usually are fairly straightforward to answer as long as you have some familiarity with the ways the markets work.
Your experience can be proved by showing that you have been trading for a certain time, or have derivatives experience. Generally clients who only trade shares will be able to qualify if they are able to demonstrate that they have executed more than 36 share trades over a 12-month timeframe or longer. You can’t really get around this one, as your trading will be recorded. The rules don’t say that you necessarily have to have made a profit, just that you should have done so many.
All this is so that you qualify as an ‘intermediate’ investor and are allowed to have an advisory account. It may seem strange that you have to prove your experience when you are wanting to open an account where you get more help than with an execution-only account, but the rationale is that you may be discussing particular advanced strategies and techniques with the dealer, and should have sufficient knowledge that you can understand his suggestions.
When you have successfully opened your CFD advisory account, you can expect a host of benefits. You will receive regular trading tips by e-mail or telephone, and these will be based on research and/or the dealer’s contacts in the markets. You should also expect a full explanation of how the recommendation was derived and the broker’s assessment of the possible risks.
Opening a CFD advisory account is one of the best ways to advance your trading knowledge and career. Effectively, you’re gaining access to a mentor who can show you trading tricks that you may never have thought of.
Advisory Services Trading Costs
As you would expect, CFD advisory services come at an additional cost. However, given the willingness of brokers to negotiate better commission rates with people on their preferred client list, that becomes less and less of an issue over time. Do negotiate with your advisory broker as they are often prepared to discuss on commissions and charges depending on the size and frequency of your trades. Do however keep in mind that costs shouldn’t be your only determinant factor in choosing which advisory service to use. As John Ruskin said ‘it’s unwise to pay too much, but it’s worse to pay too little’.
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.
One advisory broker 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 0.10% commission for CFDs based on UK and Australian equities, that rises a notch for some European stocks. Generally, the more liquid the underlying asset you want to trade, the lower the commission.
However, one point worth noting here (and this applies for advisory services in general) is that sometimes it is better to pay a direct fee for the advice yourself as in this way you free yourself from the risk of product bias that can happen when your broker gets a commission payment from a product provider. Commissions act as an incentive to sell a product, the greater the commission the greater the incentive. This means that even if an advisory broker doesn’t charge you extra commission, he might try to make you trade more often than needed so as for him to earn more commissions. On the other hand a fee-only adviser is tied to the client and has no scope to recommend one course of action over another and simply offers the most appropriate recommendation for that client. An adviser who is paid on commissions still has to recommend a product that is suitable but they do not have to do what is in the best interests of their client. For instance a tracker bond might constitute a suitable investment for a client, but if they have some debt to pay wouldn’t it be better to utilise that capital to pay back that debt as opposed to investing it? A commission based adviser who recommends a client repay debt is simply not getting paid at all.
What makes a Good Advisory CFD Service?
Choosing a good advisory brokerage is no simple feat as the industry lacks any kind of transparency and most advisory brokers will not divulge past performance rates on the premise that each portfolio is tailored to a particular person’s needs taking into account such factors as age of clients and risk tolerance. I find this unacceptable as I believe that if a broker calls themselves an expert and keeps calling you trying to get your custom, to help you make better trading decisions (taking a fee in the process), regulations should ensure that they are able to back their claims with solid facts.
Not all advisory services are created equal and I quickly discovered this to my peril a couple of years ago. I wanted to use CFD as a hedge starting back in April 08 when I thought market was overblown. I was using an advisory service. What I told them was that I wanted to go short on shares I held such as RIO and TLW. This would mean setting wide stop losses and keeping positions open for perhaps months. Instead my advisor took large positions (e.g. 1,000 RIO at £65 a share) with stop losses set around 3% of the opening price. Volatility resulted in stop losses turning paper loss into real loss. The limit prices were set such that profits taken too soon. In a bear market short positions could be left open for months. The company that was advising me made plenty of money out of me and has since has gone into liquidation.
Three qualities that you would do well to seek in an advisory service are honesty, expertise and integrity. This doesn’t mean that fees and costs are unimportant but you should be more concerned about the services you receive as opposed to the fees you pay. Bear in mind that most ‘advisory’ based brokers make money from the trading commission and consequently it is in their own interests to ensure you trade more frequently than you might otherwise do so, effectively applying a shotgun approach to buying/selling. Some more responsible firms apply a sniper’s approach such as you, I or any other sensible investor may adopt – though they are few and far between.
And a note about account classification. The way your CFD trading account is classified will make a difference to how you can trade. Your CFD advisory broker might prefer to have you as an ‘intermediate’ account, signalling a competent degree of knowledge and experience, but it is best to go for the private account as this often comes with better pricing terms.
The importance of honest advice cannot be understated. A competent adviser is more than just a product salesman. A good CFD advisor will take time to understand your personal preferences and tailor the advice, research and trades to fit your individual circumstances. The advisor will also educate and will explain the methodology behind each recommendation for any trade so you can decide for yourself whether or not you want to follow the advice. This is usually complemented with charts and an explanation of the trade. The broker should also note suitable entry and exit trade levels coupled with a recommended stop loss level. A good advisory service is not just one that helps you getting trades right but also one that helps you manage your risk exposure. In addition, an advisory broker will listen to your trade ideas and will provide you with an honest opinion of whether your idea could make a good trade or not and this can help minimime the number of bad trades. An adviser providing an honest service can ensure that you remain disciplined and capture more of market moves that is there for the taking rather than being excessively influenced by short term factors or the media.
CFD advisory brokers often also make large quantities of information and tools available to their clients. A good brokerage company will not only provide you with charting tools but will also provide you with regular market reports and will keep you abreast of company results or important economic data releases that might affect your positions.
Note that a regulated advisor is obliged to have professional indemnity insurance. This means that if they provide advice which turns out to be negligent or incompetent (in worst-case scenarios) you as a client of that CFD adviser are protected by that insurance policy. Additionally, advice supplied by a regulated adviser is covered by both the investor compensation scheme and the ombudsman service.
Please note: Personally, I rarely seek nor listen to any broker. If you do you’ll find the broker calling you very, very regularly, taking you in and out of a stock. I have found my own hit rate to be at least as good if not better than any broker I’ve listened to in the past. As you are margin trading you’ll find you are doing bigger size transactions than you would be if you were paying in full for the holding.