Effective management includes taking steps to future-proof your investment fund against unforeseen circumstances. This has been especially true in 2020 as the Coronavirus Pandemic continues to disrupt the global economy.
So how does an investment fund protect itself? The answer is simple: diversify your key service providers (namely banks and brokers).
In the past, low-cost has always been the driving force when finding a bank or broker. But low-cost is no longer the most important issue – risk management is.
What Happens If Your Broker Goes Under?
If the global economy suffers a significant financial shock, brokers can be exposed to the impact. That’s why it’s important to use two or three brokers.
Let’s consider a real-world example from Interactive Brokers. Recently, there was an unexpected movement in the markets when the price of oil went negative. Subsequently, shares in Interactive Brokers fell by approximately 10% in early April and the firm lost $88 USD million.
Specifically, many of Interactive Brokers’ clients had been caught out when WTI Futures contracts turned negative (something which has never happened before) – which meant the firm had to intervene and pay the margin calls owed to clearing houses.
Multiple clients at Interactive Brokers had long positions on WTI Futures. So as the price for WTI Futures turned negative, those clients lost more than the equity in their accounts.
This demonstrates that unusual events in the financial markets can put real pressure on the most successful broker firms – and it highlights the importance of having more than one broker account.
It also highlights the importance of having someone you can reach by phone. In today’s financial environment, trading with brokers is – in most cases – fully automated. However, if something goes wrong, you must be able to speak with someone. Unfortunately, with many brokers this is close to impossible.
Remember – your priority as a fund manager is to protect your fund’s assets. That’s why diversification matters. Here at IFINA, we can help you navigate the enduring uncertainty of COVID-19. Specifically, we can help you set up two to three broker accounts and at least two bank accounts.
Do you need assistance in diversifying your service providers? If you do, just email me and we can arrange a free Skype consultation.