Blog | StoneX Futures

5 Key Questions to Ask a Commodity Trading Advisor | StoneX

Written by StoneX | Mar 22, 2018 5:00:00 AM

The astronomer Carl Sagan once said there was no such thing as a dumb question. And that’s because the worst thing you can do is not ask all the questions necessary to obtain vital information.

This is particularly apt when you are considering working with a commodity trading advisor, or CTA, in a managed futures program. After all, you’re looking to earn a decent return on your hard-earned capital.

Managed futures involves investing in pools headed by a CTA; the commodity trading advisor is required to register with the Commodity Futures Trading Commission and must pass the Series 3 exam.

The benefit for investors is that they can tap an experienced trading advisor to diversify into futures, such as stock indices, currencies, energy, metals, and agriculture commodities.

But even with the certifications and experience, you still need to ask some probing questions of your prospective CTA to fully understand the person and the firm she represents. If possible, it’s advisable to visit the CTA’s office in person to get a deeper feel for the operation.

There are some important techniques to use when asking questions as well. Remember to ask concise, open questions that prompt the advisor to answer more fully.  Don’t let him get away with a yes or no answer when you need an answer in depth. So, don’t ask questions like, “Do you have good taste in shoes?” Because that usually serves up only a “yes” or “no” in response. The better question would be: “Can you describe your investment strategy when it comes to buying shoes?”

Another good technique is to ask questions using simple language, which signals to your interviewee that you don’t want a lot of jargon. You need answers delivered in a straightforward, down-to-earth manner.

Keep in mind that investing entails risks, and individuals must carefully evaluate their financial position before making a major decision, including working with a CTA.

The Five Questions

Here are five important questions to ask of a prospective commodity trading advisor. It never hurts to start with a soft question to get him or her warmed up:

  1. What are the minimum investment requirements? Please furnish a real-life example of how these requirements work within an individual’s portfolio.
  2. Can you explain, with in-depth details, your investment strategy? Or, in short, what are your trading goals?
  3. How does your fee structure work? Can you explain how the charges are imposed on a model portfolio?
  4. What is your investing track record in this field? Please detail the decisions you have made when faced with tough market conditions, including where you incurred losses and how fast your position recovered.
  5. Keeping up to date with the fast-moving global markets is crucial. Can you explain, in layman’s terms, the technology you deploy to stay on top of financial markets?

You may have more questions that pertain to your individual financial circumstances. You can also close your interview along these lines: “Your answers have been very informative today, but is there anything I’m missing? Is there something you should tell me that I forgot to ask?”

Conclusion

In summary, getting to know your commodity trading advisor is a major step in your decision on whether to go with a managed futures program. Don’t be afraid to ask the simple and the tough questions — because your financial well-being may be at stake.

Managed futures may have a place in a well-managed and diversified portfolio. A managed futures specialist at StoneX can take you on a guided tour if you would like to learn more about investing in futures markets.