A friend of mine in Ireland was absolutely convinced that I should set out and start my own forex brokerage. Don’t you just buy a MetaTrader license and the money starts rolling in?
Instead of trying to persuade him why I wasn’t in a position to succeed, I told him a few stories about people that have done well opening their own forex broker.
Who succeeds as a forex broker?
Some of the most successful brokerage owners are immigrants to English speaking countries like the US, Ireland or Australia. They’ve started businesses before and have done well for themselves. Most of these immigrant entrepreneurs have a large number of family members back home that are eager and willing to help launch a new venture.
I put together a few entrepreneur profiles to show who tends to do well in this type of business.
The local option
Hinh left Vietnam in the early 1990s for better opportunities in Canada. He’s done well for himself operating a local restaurant chain. Although he’s been gone for 20 years, he regularly travels to Vietnam to visit uncles and cousins.
His relatives recently started trading forex and sensed a business opportunity. There are almost no brokerages in the country with a local office. Nobody feels really comfortable with the current options out there, but where else can they trade?
The cousins and their sons have been introducing a few accounts to the major brokerages but feel like they’d do a lot better keeping everything in house. Maybe Hinh could put up the seed money to start a new business that can cater to local needs?
The cousins start running seminars for their friends and neighbors about forex. People like the idea of managing their own investments and open their accounts based on the trust and relationships they’ve built with Hinh’s extended family.
The specialist firm
Thomas is a British investor living in Portugal with his Russian wife Anna. He’s been dabbling in the forex market as for five years. It’s only recently that he feels like his investment abilities are put to better use in currencies than shares.
If he were to raise funds for investment in the stock market, he’d spend a king’s ransom before he was legally permitted to earn a penny. Focusing on FX allows him to raise money from around the world with significantly less money up front.
He also knows that his reputation is on the line, so he doesn’t want to pick a firm out of thin air. Thomas believes he’ll do far better running everything entirely on his own.
He starts a broker and, largely on a hunch, decides to target Russia, South Africa and Mexico. Partly from two decades of international travel and partly due to luck, Mexico happens to be a market that’s very receptive to managed funds products.
Thomas has a background in marketing and sales, allowing him to identify high net worth investors quickly. After making a few business trips between Portugal and Mexico, he lands the accounts that he needs. As he establishes himself over the next two years, his brand becomes associated with quality managed accounts and trust with larger deposits.
Why forex and what’s my competitive advantage?
Immigrant entrepreneurs do well with forex due to the underdevelopment of their home countries. Consider the example of Hinh from Vietnam. The local stock market is not noteworthy. There’s no such thing as an IRA account or municipal bonds that you go buy for your retirement account.
People with savings need to put that money to work. Running a global forex brokerage offers that capital an outlet to international markets. It doesn’t really have anywhere else to go.
At the moment, there’s not a lot of competition in these emerging markets for local brokers that build relationships on a person to person level. Running Google Ads and the usual online marketing tactics are saturated.
The one way in which the FXCMs and Saxo Banks of the world cannot compete is on personal relationships. If you or your family members are good at networking and can show new traders how to succeed in the market, you have an edge that is difficult to compete against.
What you might see as your disadvantage, being a new broker in the market, is actually one of your biggest strengths. You’re not yet worth competing against. That will undoubtedly change in a few years as the idea of forex establishes itself in frontier markets.
Assuming that you succeed in your home country, the global nature of the market gives you worldwide opportunities for expansion. It’s common for someone to incorporate in Spain, run their operations from India and run a sales team in the Philippines.
An enormous percentage of internet users know some degree of English, at least enough to open and maintain a forex account. The barriers to trading are also fairly low; anyone with a cell phone and basic English can manage a trading account. The presence of a common language allows brokers to expand and run their operations where time zones and costs present an advantage.
The best candidates for launching a broker are IBs with a substantial client base. They usually run in-person classes, manage money or have a substantial internet presence. It’s not all necessary to be great at everything. Most start up brokerages find a niche within the trading community and use that as a base to build from.
How much money do I need to invest to be successful?
A forex brokerage is a financial institution. If you’re going to do start a brokerage and expect to do well, an investment of $100,000 is a reasonable starting point. That amount of money should cover the following:
- Incorporation and initial legal compliance costs
- Technology setup and maintenance costs for the first year
- A sufficient marketing budget to open new accounts
- Staffing to run the operation 24 hours a day, 5 days a week
Like any new venture, some businesses do well and others don’t. According to Erich Grant, head of the Start A Broker (SAB) program at Shift Forex, the brokers that thrive tend to turn a profit within the first 6 months.
Given the risk involved, it’s important to identify your personal advantages and whether the potential opportunity is large enough to justify the risk. Email info@onestepremoved.com to learn more details on starting your own FX broker.