The CFD Advisory industry “real” practices revealed..!

8 mins. to read

Judging by downloads on our website for the CFD’s – The Complete Guide, it seems that many of our readers trade in these instruments, although why they do not trade in spreadbets and so avoid tax on gains is an interesting question…

Having worked with many of these firms over the last few years and seen the antics that a lot of them play with regards to client accounts, I thought it useful that I actually lift the lid on what can appear to be a complex industry and reveal how it really works to our readers. Prepare to be educated…

The CFD advisory business sprung up in the late 90’s/early 2000’s initially in the UK and then becoming accepted practice in many European countries too as an answer to the age old “margin trading” structure in the U.S. that was not, in its raw form, really available here.

With the passing of the old stock exchange “account settlement” basis in the early 2000’s; where clients were effectively trading on margin through only needing to settle profits and losses at the end of, from memory, a 3 week accounting period, CFD’s thus filled the gap perfectly.

Initially commissions were high with up to 100bp being charged either side and financing rates of 3% above and below LIBOR. These type of margins of course attracted more players and so rates fell dramatically for pure execution to as low as 5bp and financing of +/- 1.75%. NOTE – if you are paying more than 10bp on your CFD execution only trading then switch business!

CFD trading per se is thus a perfectly acceptable form of margin trading. From an “execution only” perspective it is a fantastic way to gain leverage on stock investments and, when allied with strict money management, is one of the few ways to generate real outperformance from an account. Problem for many (and the same with spread betting), is that the firms themselves give you too much leverage and as the odds are stacked against you they then generally “A” book you. That is, they in aggregate take you on in the expectation that you will lose over the term of the account. Interesting bed partners eh?

When I was personally trading with one spread bet firm that is now defunct, in the process stealing six figures from me (WorldSpreads) and was making money, I was in fact initially called by one of their dealers and asked if I would be prepared to take my account elsewhere as they are not used to clients making money (true!). Pretty soon they realised they should be “B” booking me (that is hedging trades in the market so they did not lose to me) and so my “business” was allowed to continue on with them.

At this stage, let me make clear that this expose is really geared towards the “advisory” CFD area of the marketplace where the real unscrupulous practices occur. Let me explain how it works…

Firstly, if you check the FCA register on most of these firms you will see that they are generally what is termed “Appointed Representatives” of another firm, usually one of the majors like IG or Saxo. In effect,they are tucking in under the licence of the majors and acting as mere introducers of business to them. When you trade with “CFD’sRUs” or whatever they are called, although the platform and trade confirm sheets will have their logo on, look closely at the foot and you will see that the authorisation is via a third party larger firm.

Now, the real eye opener.

Revelation (1) – If I told you that many of these firms that purport to have proprietary research from teams of analysts were buying this “research” in from the same 3rd party what would you say? Here’s a link to one of the primary suppliers of these ideas to the industry – Another supplier is a Central London PR company that packages none other than the likes of Zak Mir’s TA and that can be picked up from for the princely sum of £179 p.a In effect, most of these CFD advisory firms are NOT actually producing in-depth in house research that justifies the excessive commission charged (many advisory firms charge an amazing 50-70bp on each side of a trade) but merely regurgitating someone else’s trade ideas.

Revelation (2) – The very, very vast majority of these chaps that plague you with telephone calls encouraging you to trade are in their early 20’s, are paid peanut basic salaries and almost all their remuneration comes from commission they receive each time YOU trade. Now, think about that for a moment. Twentysomething young males (and they are nearly always male) being paid a basic wage that barely covers their travelling costs to their offices and being attracted in the first place to the City’s presumed gold paved streets, where do you think their focus lays – with your wealth or with their end month pay packet?

One former director of one of the shadiest firms in the City and whom have a shocking review (visit Trade2win for some no holds barred reviews of many of these firms) of them on the internet revealed that when a client opens an account of typically £10,000, the “boys” on the desk view that money as theirs. That’s right, it is a commission pot to be plundered through excessive trading not an account to be grown for the client’s good.

Not surprisingly, in this high pressure and cut throat game, staff turnover is incredible with a steady stream of new entrants being required by the CFD firms to ply their “advisory” wares to the gullible investing public. The average employ period we understand is less than 6 months. How on earth can such a short-termist and misaligned approach actually result in wealth creation overall for clients?

You can see so far then how this game is basically built around the following business model – obtain some (usually) London office space to give the impression of a respected City company, employ for peanuts with commission being the primary focus for them lots of young City wannabes that have to pass the flimsiest of FCA required exams in order to be registered as what is called a CF30 (Customer Function) that allows them to legally talk to you, buy in for a few grand a month some third party research and then hit the telephone tapes in hooking in members of the public looking to play the stock market. Hey presto!

Revelation (3) – The problem with this model is that given that generation of a trading idea is one thing, the young lads on the desk generally have no formal training and qualifications in real money management. The odds are thus massively stacked against you. Another insider revealed to me that the average CFD account “life” is less than a year and the lower the value of the account, the greater the chances of the account being completely wiped out. The larger accounts have more of a life as of course there is more commission to be taken over a longer haul. Typically over 90% of client accounts lose money we are told from insiders.

The desk at these firms generally operate around the following structure – there is what is termed a “trader”, this is the chap who has responsibility for his “team” members and the trades incepted. He collects most of the commission and has usually come through the ranks from being what is rather optimistically called a “sales trader” (these are the cannon fodder young chaps on £15k basics whose job it is to basically call the public up all day long trying to get them to open accounts). At this stage refer to the move boiler room and you will see how this structure works!

Revelation (4) – one firm whose logo and name would incline you to believe they are “first” in the industry actually asked me personally to lend them a few thousand pounds last year to pay their staff wages as they were trading insolvently. Think about the scruples and morals of such a firm – knowing full well that they were running out of time they continued to trade with their clients AND in full breach of FCA rules. Is that the action of a counterpart that is “fit and proper” per the FCA’s requirements and has your interests at heart?

To conclude, the retail CFD industry is riddled with practices that are completely dichotomous with the so called principles of the FCA’s requirements for selling financial services to the UK investing public, that is fair dealing, appropriateness of product, fit and proper basis of operation etc. I personally call on the FCA to rout out the bad apples along the lines of the likes of Blue Index and close down many of these shady firms.

The next time a twentysomething calls you up with a trade “idea” to make you rich, ask him how much he has personally made out of these trades, if his firm keeps a record of their REAL LIVE trades and how long he has been working there. You probably will no longer be surprised with the answers after reading this!

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