What it means
The foreign exchange (forex) market is where currencies are traded, and it is open around the clock on weekdays. Individuals can open accounts with a broker, but profitable trading requires constant attention.
A managed account lets the client hand day-to-day decisions to someone else through a trading authorisation or power of attorney. The manager normally charges either a management fee based on the account size, a performance fee on profits, or both.
Many arrangements use a high-water mark, which means a performance fee is only charged on profits above the previous highest account value. Without that protection, a client could pay fees twice on the same recovered losses.
Forex trading is usually leveraged, which means the account controls positions far larger than the cash deposited. Leverage magnifies gains and losses alike, so a small adverse move can wipe out a large part of the account.
That is why regulators in many countries restrict or warn about retail forex products. This is a sector where fraud and misleading claims are common.
Warning signs include guaranteed returns, pressure to deposit quickly, managers who require the client to send money to them rather than to a regulated broker, and track records that cannot be verified. A client should check the manager's licence with the relevant regulator before sending any money.
Sensible due diligence includes confirming that funds stay in an account in the client's own name, that statements come directly from the broker, and that the fee terms are written down. The client should also be prepared to lose some or all of the capital committed.
Costs go beyond the manager's fees. Spreads (the gap between buying and selling prices), overnight financing charges on leveraged positions and withdrawal fees all reduce returns, and a manager who trades very frequently can generate large trading costs even when the strategy is sound.
In practice
Real-world examples.
Example
A dentist with $150,000 in surplus savings appoints a regulated manager to trade currencies through her own broker account. She receives daily statements from the broker and can withdraw funds at any time. The agreement caps the leverage the manager may use and sets a limit on how far the account may fall before trading stops.
Example
A small importer decides to speculate with idle dollar balances instead of leaving them in a deposit account. After two losing months he stops the arrangement, recovering the remaining balance because the account was in his own name. He compares the fees he paid with the result and decides that holding dollars would have been simpler.
Example
A retiree receives a message promising monthly returns of 10% guaranteed from a forex manager he has never met. The promise of guaranteed returns is a classic warning sign, and he reports the approach to his local regulator. He also warns his friends, because such offers are often sent to many people at once.
Formula
Calculation
Net profit to client = Gross profit - Management fee - Performance fee
Performance fee = (Profit above high-water mark) x Performance fee rate
A client opens a managed account with $100,000. After a year the account has grown to $118,000, a gross profit of $18,000. The manager charges a 2% management fee, which is $100,000 x 0.02 = $2,000, and a 20% performance fee on profit. The performance fee is $18,000 x 0.20 = $3,600, so the client keeps $18,000 - $2,000 - $3,600 = $12,400, a net return of 12.4%.Case study
Seen in the real world.
Tidewater Partners is an illustrative, fictional currency manager that runs accounts for private clients. A new client placed $250,000 with it, and the written agreement set a 1.5% management fee, a 20% performance fee and a high-water mark.
In the first year the account fell 8% to $230,000, and no performance fee was charged. In the second year it recovered to $245,000, which was below the original $250,000 high-water mark, so again no performance fee was due.
Only when the account passed $250,000 in the third year did the performance fee apply, and only to the gain above that level. In this illustrative story, the high-water mark kept the client from paying twice for the same recovery.
Watch out
Common mistakes.
- Believing a manager can guarantee returns, when currency markets are uncertain and no regulated manager can promise a profit.
- Sending money to the manager's personal or company account instead of a broker account in the client's own name.
- Ignoring leverage, which can magnify losses to the point where the whole balance is lost.
Questions
People also ask.
Are managed forex accounts safe?
They carry high risk because of leverage and market volatility, and they should only use money you can afford to lose.
How are managers usually paid?
Through a management fee, a performance fee or both, and a high-water mark is a good term to look for.
How can I check a manager?
Confirm their licence with the financial regulator in your country, ask for statements directly from the broker and be sceptical of any pressure to act quickly.
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