Selecting a Commodity Trading Advisor
7 of 8 in Series: The Essentials of Commodities Trading
If you are trading commodities through a managed account, you need to select a commodity trading advisor (CTA). A CTA is a securities professional who is licensed by the Financial Industry Regulatory Authority (FINRA) and the National Futures Association (NFA) to offer advice on commodities and to accept compensation for investment and management services.
Here are a few important questions to ask when you're looking for a qualified CTA:
How many years of market experience does he have?
What is his long-term performance record?
What is his trading strategy and does it square with your investment goals?
Does he have any complaints filed against him? (This information is publicly available through the NFA.)
How many accounts is he currently managing? If the number seems high, your account may not be a high priority for him.
Does he have a criminal record? If so, find out the details of any arrests or convictions. This information is also available through the NFA.
Before you select a CTA, perform a rigorous background check. A CTA is required to register with the NFA to transact with the public. You can find out a lot about a CTA by visiting the NFA Web site.
After you perform due diligence on your CTA and feel comfortable with him, you’re ready to turn over trading privileges to him. How do you do that? You sign a power of attorney document, which gives your CTA full trading discretion and complete control over the buying and selling of commodities in your account. That means he makes all the decisions, and you have to live with them.
The main benefit of the managed account is that you get a trained professional managing your investments. The drawback is you can’t blame anyone but yourself if you incur any losses.