In this article we will look at how you can prove your trading performance.
This will help you to find professional investors. It will also help you to add credibility to your business in general.
Increased credibility will help you to grow your business much faster. If you’re an investor then this article will help you verify traders more reliably.
We will be looking at the following points:
- Low cost third-party verification
- Letters of opinion
- Full trading account audits
Performance verification is one way to help investors ensure that your business is legitimate.
In 2014 the CFTC reported on the scale of Forex trading scams in the US alone. They estimated that 26,000 people lost almost $460 million in between 2001 and 2014.
Investors are becoming more sophisticated. Displaying credible performance verification helps them know you’re real.
The concept of verification is often misunderstood by many people. Some give more value to basic forms of verification than is really due.
Others do not understand the difference between letters of opinion and audits.
What many people do not know is that there is an international body responsible for audit standards.
This organisation is called The International Ethics Standards Board for Accountants.
They set out standards and guidelines that the industry should follow. Most large accounting firms globally follow IESBA standards.
Performance verification is similar to financial regulation when it comes to increasing credibility.
It is also as important as selecting the correct structure for your business.
Low Cost Third-Party Verification
We will begin by looking at the most basic forms of third-party verification available. These are usually automated websites that connect to various trading platforms.
The idea behind these sites is to pull the data directly from the trading account itself.
This stops the trader having any influence on what is displayed.
With the advent of internet-based technology these verification sites are commonplace.
Very often they are also free to use.
Trading performance verification is only one of their functions. They also serve as a great way to see the statistics for a trading strategy.
They allow the trader themselves to see how the data behind their trading breaks down.
They also allow any potential investors see the quality of the trading strategy at a glance.
The downside to these websites is that the data is easy to manipulate.
For example, the software plugs right into the trading platform itself. If the broker is partnered with the trader then this could lead to manipulated results.
In 2018 the FCA published a report into Forex Broker Scams.
It explains that unscrupulous brokers often falsify trading performance to attract investors.
The broker you use should be regulated in a trusted jurisdiction. These brokers are far less likely to engage in this type of behaviour.
There are several other ways of posting misleading performance data. There are many forums online discussing all of the tactics used.
Verification sites are great for visualising your trading performance. They are also good for breaking the data down into insightful sections.
However, these sites should never be the only method used to verify your trading performance.
Professional investors will demand more as you start to scale up your business.
Letters of Opinion
A letter of opinion is one way to increase the credibility of your performance verification.
Reuters provides some guidance on what an opinion letter is.
They explain that it’s a written statement from a third party. It shows they have checked over the trading results.
A letter of opinion could be from a certified accountant. They are also common from regulated brokers.
These letters are more reliable because they are much easier to verify. The investor can contact the writer directly and double check its accuracy.
The person behind the letter can also be checked for credibility.
A CPA or accountant that is not registered should not be trusted. A broker that is not regulated shouldn’t be trusted either.
A letter of opinion is a form of trading performance verification. The way it works is quite straightforward.
The person verifying the trading performance will have full access to the trading account in question.
This allows them to dig into the history and check that all trades have been accounted for.
If it is being conducted by a CPA or accountant they will contact the broker directly. They can ask about specific trades.
The downside is that a letter of opinion is still very easy to falsify.
The only advantage over the automated verification websites is that it’s easier to see who created the letter.
This allows the investor to continue their due diligence beyond the letter itself.
As you grow your investment management business you should start producing letters of verification to investors.
The verification should be done by certified or regulated financial professionals.
Legitimate professionals will only put their name behind a verification letter if they are confident.
According to Carr-Mccellan, a letter of opinion can range in cost. A standard letter can cost anything from £2,000 to £5,000.
Full Trading Performance Audit
The most reliable form of trading performance verification is a full audit.
An audit is very similar to a letter of opinion. The key difference is that greater lengths are undertaken to ensure accuracy.
A CPA might investigate the trading account for their letter of opinion. An auditor will go one step further than this.
They will want to investigate each individual trade. This involves finding out exactly who provided the liquidity for the position.
They will then contact the liquidity provider to ensure the trade happened in the way that is being reported.
They will also contact the bank accounts of the trader and the brokerage. This investigates the trail of money.
This ensures that all profits or losses occurred via trading activity as reported.
Multiple third parties are involved in the audit process. There can be dozens of liquidity providers and banks.
By expanding the scope of the checks, the auditor reduces the likelihood of falsified reporting.
If you’re operating a hedge fund then an audit will be a regulatory requirement.
The downside to having an audit is that it is very time intensive. This naturally makes it expensive.
According to Baker Tilly, the cost of a standard trading account audit is around $10,000. This can make it prohibitive for start-up asset managers.
If your business can afford the cost then an audit is highly recommended.
3 Ways to Verify Your FX Trading Performance
Most start-up asset managers will not be able to afford an in-depth trading audit.
In the early stages it is important to combine as many different forms of verification as possible.
Automated verification websites can give clients an insight into how your strategy looks. You can combine this with giving potential investors ‘investor only’ access to your trading.
This lets them watch and monitor your trading in real-time. This combination is perfect if you’re trying to build your client base from zero.
Once your business is growing you can add in a letter of opinion from a credible source.
This allows investors to perform further research on the various providers you are working with.
Finally, you should commission a full audit of your trading performance each year. This is essential to attract high quality professional investors.
If you operate a hedge fund then you will no longer be able to publicly display your trading performance.
This may result in you no longer using automated verification sites.
This is where you will start to rely on more credible verification strategies to build your business.
If you have any questions about verifying your trading results effectively then please write them in the comments below.
I try and read each one and base future articles on your feedback.