Feb 09, 2018 Imagine, if you would, that the managed futures space is a puzzle. Except that it is constantly adding new pieces into an unknown, multidimensional shape. For an Introducing Broker (IB), a piece in the middle of that puzzle, how one connects an investor to a commodity trading advisor (CTA) may be a simple interlock: the CTA performs one function, communicates with the IB, which then in turn performs another. Their only understanding of the other’s function is based upon the seam that connects them. Yet the managed futures space continues to grow, and with it the number of CTAs and IBs connecting with each other. In this evolving space, how and an IB and CTA form a symbiotic connection to best serve their customers? At its foundation, an IB is a business, and a business must market itself to the customers it wants to attract. Before considering a marketing strategy, however, it must determine its customer base. To elaborate on the puzzle metaphor, not all pieces fit together. Marketing fundamentals require a defined target audience and research into that market. For IBs that want to offer managed accounts, that means finding a niche within the managed futures space and then identifying CTAs which fit into that niche. Perhaps that means focusing on a specific commodity market or purely discretionary CTAs. Maybe it is focusing on a particular market sector your customers are familiar with or accommodating large investors with portfolios that require multiple CTAs. Determining the CTAs that fit with an IB’s customer base requires introspection by the IB into its own operations and a focus on its area of specialty. Ultimately, a good IB is one that starts in the area it knows best. Traditional Sourcing: Databases Once the IB has figured out its direction and the type of CTAs that would best fulfill its customers’ needs, it must research those money managers to find the right fit. Searching the large CTA databases for advisors that fit the IB’s paradigm is an excellent way to begin. After finding some managers that may fit the IB’s operations, it is necessary to learn more about how the CTA functions. This means calling them, asking about how they trade, and learning if they may be a good fit. As you are calling on behalf of current and future investors, you should evaluate a CTA as if you were investing your own personal funds with them. Request their disclosure document, observe their performance, or whatever other metric you decide to use, but make sure it is thorough and ask the tough questions when necessary. This process may take a while, and it may feel awkward or challenging, but rest assured that the CTAs contacted will appreciate the interest. Turnkey Trading Partners (Turnkey) works with a broad variety of CTAs and knows firsthand that most CTAs are eager to find an IB that wants to work with them. As much as an IB wants to find the CTA puzzle pieces that fit, the CTA wants the same. But in Turnkey’s experience, many IBs do not put the time and research into getting to know the managers; they force the pieces together, forgetting that it is ultimately the investors’ interests they must consider. Progressive Sourcing: Analytical Platforms The purpose of sourcing CTAs is to find new talent and ultimately match the customers’ risk-reward requirements and investment portfolio. The emergence of improved technologies in trader evaluation has allowed for a new type of database to develop: one which can analyze an investor’s goals and a trader’s strategy and performance to help them find a more perfect fit. Take Fundseeder Investments (FSI), for example: by running statistical analyses on a trader database, they predict trader potential in order to more accurately match CTAs to a customer’s particular investment style or goal. In doing so, FSI foregoes much of the time consuming research done in Traditional Sourcing by relying on algorithms to scour their non-traditional database, identifying both known and unknown talent. Relying on such methods not only saves time and energy, but provides a predictability of success. However, an IB cannot eschew all responsibility into researching how a CTA fits with a customer, as the CTA and IB must be able to work together. You’ve done your due diligence on the managers, but why should they use your IB? As a business, there are certain goals an IB hopes to achieve and specific ways in which to get there. In specialized marketing, detailing those goals and how success is measured impresses upon a customer that the business is professional and sophisticated. It distinguishes one IB from another and demonstrates your IB is prepared to go the extra step for its clients. Differentiating from the competition is fundamental in attracting new customers. In determining the customer base, the IB had found its area of expertise; use that to your advantage. Present to CTAs how the IB focuses on a particular market or asset class so that it reassures them they are getting the best fit for their own goals. There may be an assumption that there is no way to differentiate one CTA or IB from another; that things are going fine the way they are. In order to dissuade this basic misconception, one must looks at how many CTAs develop. Developmental Sourcing: Hidden CTAs Many sole-proprietors turned CTAs, that Turnkey has helped to become operational, have originated from IB firms. Depending on the structure of the IB, the business may be successful because of the broker-assisted traders utilizing the IB’s discretionary trading platform. By those traders learning and growing the IB business, they become experts in a particular niche of trading; a niche that will probably coincide with the IB’s. So instead of only seeking out CTAs that fit into the IB’s parameters of trading, perhaps propose to the customers the option that a portion of the current IB operations become a CTA. After all, there is a stark familiarity with these particular customers, having seen their trades and watching their accounts for years; a hidden CTA. In this, the traders within the IB have gradually become managers tailored to specific customers and have learned different trading strategies. These learned skills may eventually develop into someone becoming a CTA. Turnkey has worked with numerous CTAs, and many of them chose to register because a friend, family member, or even their broker told them that they were a good trader. Many traders do not consider managing money for other people until someone else puts the thought in their head and they enjoy the idea of becoming a CTA. Perhaps someone in your operations fits the description of a good trader and it may be in the best interest of everyone to ask them if they have ever considered trading professionally. In this situation, there is strong potential for a unique CTA relationship, tailored to a specific IB investor base. Of course, it is not as simple as telling someone they might make a good trader and them becoming a CTA; they must become a registered NFA member. As an experienced IB, you may be asked for advice regarding CTA registration. In this, there are a couple of options. Develop an internal staff to assist the new CTA in becoming registered: including the development of procedures and disclosure documents, marketing, accounting, and all other necessary set up materials. Another is to outsource the work to a company such as Turnkey, which specializes in the streamlined assistance of startup firms. Turnkey regularly works with CTAs originating from IBs, Futures Commission Merchants, and sole-proprietorships from all over the world, helping them to become registered and navigate the necessary startup procedures. With the assistance of Turnkey, many IB firms have added tremendous value to their customers without any out-of-pocket costs. These firms have capitalized on the hidden CTA, incorporating a uniquely tailored product into their operations and offering their customers a new and customized product. Yet the benefit of the hidden CTA is not only its unique integration, but that it does not disrupt the previous CTA relationships; the puzzle remains intact, but with an added dimension. It is important to remember that the IB and CTA relationship is only one portion of a large, multifaceted industry. In improving one aspect of this industry, the effects ripple throughout; there is a stronger relationship between the IB and CTA with the possibility of a new CTA product, there is new business to be had with a hidden CTA, and the investors have more options and tailored products. The hidden CTA may gain new accounts and garner the interest of other industry participants, who may allocate to that trader; a new connection in this growing puzzle. As the managed futures industry continues this upward growth, it is wise to form these solid connections and capitalize on the trend in which new investors are seeking involvement every day. Charlene Osmanski is a senior consultant with the compliance group of Turnkey Trading Partners, an award winning firm specializing in supporting CFTC registrants’ operational, compliance, and accounting needs. Charlene is a member of the State of Illinois Bar, and holds a Juris Doctor from Chicago-Kent College of Law. Charlene can be reached via email at firstname.lastname@example.org.