Similar to Registered Investment Adivsors, Commodity Trade Advisors provide advantages and disadvantages related to the trade of financial securities. In the case of Commodity Trade Adivsors (CTA), the advice given is either to individuals or as consultants to businesses. Professional CTAs are regulated by both the Commodities Futures Trade Commission (CFTC) and the Commodity Futures Trading Act that authorizes the commission.
When choosing to take advice from a CTA, it is a good idea to understand that 1. the advisor may be acting in a broker capacity and 2. should generally be registered with the Commodities Futures Trading Commission. Financial advisors who don’t regularly provide advice on commodities trading are less likely to have the distinguished experience and know how of a registered CTA. Even so, there are pros and cons to consulting a commodity trade advisor.
Pros of consulting Commodity Trade Advisors (CTA):
• Trade execution
An advantage of utilizing the services of a commodity trade advisor is they have access to propriety trading tools and algorithm based software applications that may enhance the quality of not only order execution, but also the effectiveness of that trade in terms of potential profitability.
• Know how
In addition to having access to potentially beneficial trading tools, commodity trade advisors also, have at least a minimum of know how that allows them to compete in a market at a competent level. Market competence may not always be profitable, but does increase the probability of not having to lose as much money.
In light of the qualified expertise a commodity trade advisor provides, a security of knowing one’s financial decisions are being managed by a professional is nice if not a good idea. Commodities futures can be risky investments, but when managed and properly discussed with a CTA, that risk can be betted hedged for.
Cons of Consulsting Commodity Trade Advisors (CTA):
• Corporate products
In addition to commission and fees, utilizing a commodity trade advisor may also limit investment options. If the CTA is working for a specialized financial services firm, they may be captive brokers. As such the CTA may only be able to provided financial services for specific financial products in their area of expertise or packaged and managed by the firm they work for. This isn’t necessarily a bad thing unless flexibility in financial products is sought.
Even with a Commodity Trade Advisor there will be a certain level of risk and commodities futures markets aren’t necessarily as safe as some money markets or more conservative investments. CTAs may execute and plan commodities trading, but ultimately it is only under the clients authorization. Even with a well designed commodities trading plan, money can be lost.
• Trading quality
The quality of commodities research, expertise, tools and trading can vary between CTAs. For this reason it may take a little financial savvy to recognize financial savvy. Moreover, the financially impaired leading the financially blind may not be better than learning the ins and outs of commodities futures trading and trading for yourself.
1. http://bit.ly/9tSP2F (National Futures Association)
2. http://bit.ly/aNU4pj (Securities and Exchange Commission)
3. http://bit.ly/anvnqo (Investopedia)
4. http://bit.ly/9CgsPS (Managed Futures)
5. http://bit.ly/bFivUY (Futures Trading Charts)