A guest blog by Ben Timms of HCFX.
There won’t be many businesses that haven’t had phone calls from foreign exchange brokers and there are probably even less that haven’t made the wise move to get one on board, but in an increasingly competitive market, where everyone is promising ‘a better rate’, what does real value look like?
The first point to get ironed out is that, for all intents and purposes, brokers buy from the same place – The market. Despite claims that ‘our prices are better than theirs because we buy at better rates’ realistically the inter-bank market rate is there or thereabouts where the broker is buying from and even if they are getting one pip (1/100th of a percent) better than a competitor, that’s not going to change your world. So if price savings are indeed finite, then the more competitive one broker is against another, the less money they are making – which is fine, but if they keep making no money they’re either going to go out of business pretty quickly, or will begrudgingly service your account, or both. With that in mind, would you rather have a broker that earns the money they make and enjoys a mutually beneficial relationship, or one that is so desperate for business that they are willing to give themselves away?
The second point is that no matter how good a relationship you have with your bank, they may not spend the time that a broker would in understanding your foreign exchange processes, where your risk lies and what they can actively do to help. It may not make sense for a bank to allocate this resource to you when you are already a ‘captive audience’ with a relationship manager that will make sure that you have the facility to buy and sell currencies through the bank. So a broker can tell you what to do? Not exactly. What a good broker will do is sanity check what you are doing and suggest ways of improving the situation if possible, or approving your processes and working with you to make sure that you are getting the most out of the market.
So how do you tell a good broker from the bad?
Ask them. Ask them what they would do, how they would approach the situation, what they would advise doing, what their thoughts are on the market and why. Once you’ve asked, see if you understand what they say and whether or not what you understand makes sense to you. An effective broker becomes a valuable partner to your business and what they say and advise will have an impact on your business, so a good mutual understanding is about as grass roots as it gets.
Get references. A good broker will have clients that will speak on their behalf. This shouldn’t be a written testimonial from a glossy brochure, but a conversation you can have with someone in a similar situation to you that can answer the questions you have, directly.
Look at the balance sheet. Is your broker making money? Size isn’t everything, as client money rules apply and invariably your exchanged funds will always be transacted through client accounts, which don’t make up any part of the balance sheet. What you want to achieve by looking at the balance sheet is making sure your broker is profitable and isn’t going to go out of business because they’re giving it away – that puts you back at square one.
In short, a broker is almost always going to be a better route to the FX market than the bank, but some journeys are better than others.
For additional information on providing Foreign Exchange, please contact Ben Timms, Sales Director at HCFX at bt@hamiltoncourtfx.com or:
@HamiltonCourtFX
020 7704 5652