Ep. 14: Charging Too Little

Many gifted CTAs forego significant profits because they simply don’t charge what the market would pay. Listen to today’s episode to find out why this happens and how you can avoid it, so you can earn more money as a commodity trading advisor, and attract more clients into your business.


Welcome to The Profitable CTA, the only podcast that helps commodity trading advisors grow their businesses and boost their bottom lines. I’m Kelly Hollingsworth and I’m very glad you’re here because CTA profitability is suffering, and in this show we talk about how to fix that. In every episode, we discuss a common problem that undermines CTA profitability, and the problem for today is charging too little.

This is a problem that no one wants to discuss, but after 25 years of working with you guys, I can promise you that it’s running rampant in the CTA industry.

This problem manifests itself in a few ways. Those of you who are in the business now are constantly wondering to yourselves, is this even worth it? And those of you who are successfully trading your own accounts are thinking, forget it. I just don’t need the headache. “This isn’t worth it” is a hallmark of charging too little—if you made more, it would be worth it. So today I want to share with you how to know if you’re charging too little, why this happens, and what to do about it.

Before we get started, though, I want to follow up on some listener feedback since the last episode, in which I shared some of my thoughts on why selling trading signals, as opposed to managing accounts, cuts into your profitability as a CTA.

One theme was that CTAs want to sell signals because they want multiple streams of income, and here I’d have to say that packaging what you do and selling it in different ways only works to enhance your income if one way doesn’t cannibalize the revenues from the other way, and that’s unfortunately what happens if you sell signals—you cannibalize your income from managing accounts, because if your customers can get all of your brilliance by just buying the signals, then what happens? They don’t need you to manage the account and they don’t have to pay for that in the form of incentive fee.

Another issue that came up, that actually comes up every time CTAs are pondering which way to go, is this idea: it’s easier to get customers to buy signals than it is to get managed account customers. One listener said that he didn’t know any wealthy people who would open a managed account. That’s why he was tempted to sell signals, and of course the implication here is that there’s a larger customer base to buy signals because the thinking is that they don’t have to be wealthy.

But consider this: if someone can afford to execute your trading signals in his own account, he also can afford to hire you to execute your trading signals in his account. Right? Doesn’t this make sense?

So it’s important to look at things like this as you ponder your business decisions because it illustrates that there’s a way of looking at this business that generates significant profits, and there’s a way of seeing things that has you giving away the huge value you provide for very little money–way less money than your competitors are earning and that your CTA customers are willing to pay. If you want to avoid underearning as a CTA, then it’s critical to begin seeing things in the more profitable way, and this is a nice segue into today’s topic, which is charging too little.

How to know if you’re charging too little

How do you know if you’re charging too little? One way to think about this is that you’re are charging too little anytime you’re receiving less than market rate for your services.

Now here it’s really convenient that everyone who listens to this show is a CTA, or someone who wants to become a CTA, because if anyone knows what market price means, it’s you. When we’re talking about trading, we all readily accept that the market price is whatever a willing buyer would pay to a willing seller in an arm’s length transaction.

This kind of thinking is very comfortable for CTAs. There’s no emotion involved at all, at least not for successful CTAs. Where a trade is concerned, never would a successful CTA think, well, I’m actually willing to pay more, or receive less, than market price on this trade.

But this is what many CTAs do when we stop talking about trades, and we start talking about fees. Many CTAs are less profitable than they could be, because they’re charging less than market price for what they do. Many would-be CTAs aren’t getting into the business at all, because they’re thinking they have to charge less than what customers would actually be willing to pay. Where compensation is concerned, what happens is that many CTAs abandon the idea of market price, and they instead charge a price that they and everyone else can feel good about.

I’d like you to picture this on a chart: for CTAs who charge too little, there’s one line that represents the market price for their services, the amount their customers are willing to pay, and there’s another line, a lower line, that the CTA is actually charging. The space in between, the divergence between these two lines, let’s call slippage. You know as a CTA that you want to minimize slippage in the execution of your trades to the greatest degree possible, and today we’re going to talk about how to minimize slippage in your compensation, to the greatest degree possible.

Why CTAs charge too little

And here I’d like you to notice something very strange: no one would applaud you for accepting slippage on your trades. They would want you to clear that up right flipping now. But the scary thing that’s happening in the CTA business is that many people applaud CTAs who accept slippage in their compensation, who charge less than the market price, in other words, less than their customers would be willing to pay, and they’re harshly criticizing CTAs who do charge what the market will pay.

I remember talking with a law professor who was very active in publishing very damning articles on incentive compensation. He was completely ticked off about how the managers receiving incentive fees didn’t deserve what they were charging, how they were unfairly gouging their customers, because if there were losses, it was no skin off the manager’s nose, but if there were gains, the manager received a percentage of them.

And I said, “Do you really think that’s unfair? The manager only gets paid if he makes money for the customer.” And my law professor spluttered, “Absolutely it’s unfair. And it’s especially egregious because they’re using leverage to do this.” The leverage was a really big sticking point for him.

So I thought about this for a minute, and I said, “Hmmm. You know what I think is unfair? What you’re doing. Your job as a law professor is really unfair.” And he wanted to know how his job, how he makes his money, could possibly be unfair, so then I had to explain it to him. I said, “Let’s see. You’re in this business of cranking out attorneys. Your students sign up, borrow hundreds of thousands of dollars to do so, they’re using leverage in the form of student loans out the wazoo, and then there are no guarantees that they’ll get a job or ever pay their loans back. They could easily lose money on this deal. And what’s worse, many law schools misrepresent the income possibilities for their law grads, and the students don’t find out about how easy it is to lose money on this deal, until they already owe six figures to Uncle Sam, and none of this debt is dischargeable in bankruptcy. And who are you in all of this, Mr. Law Professor who is so upset about incentive fees. You’re participating in this big machine that’s bankrupting people who will never get out of debt, but you still get your salary, don’t you?”

I’m sure I don’t have to tell you that I got a C in this guy’s class, the only C I ever got in law school, but it was worth it because this conversation was so worth it. I was happy to have this conversation, because it helped me clarify in my own mind what’s right about CTA compensation, and what’s wrong with those who would criticize CTAs for charging it. The fact is that that those who routinely criticize CTAs for charging too much are participating in their own sorts of scams all the time. They get paid whether they provide value to their customers or not. So many people are so conflicted in the ways they make their money, it’s impossible to count them all. But no one is pointing fingers at them or looking at how they make money hurts, rather than helps, others. Instead, what these folks are doing is writing articles about what you’re doing, what you’re charging for the massive value you provide, and why it’s wrong. These folks have no inclination to look at what’s wrong with what they’re doing because it’s so much easier to just point the finger at you, and complain about how you’re charging too much.

The overwhelming criticism of incentive compensation for CTAs is a problem, not just for CTAs individually, but for the industry as a whole. A big reason CTAs don’t charge what their customers would be willing to pay is that they’ve absorbed this criticism. They feel guilty even thinking about charging what their customers would be willing to pay, and that’s a huge problem. Why do we applaud athletes and tech entrepreneurs and movie stars for making millions or billions of dollars? We celebrate some people for making tons of money, but it’s easy to find article after article after article lamenting incentive fees? It just doesn’t make sense.

So I’d like you to think about this: If someone goes out and sells $400 jeans or a $40,000 facelift, no one bats an eye. Well, maybe a few people bat an eye, but there’s not with the overwhelming finger-pointing CTA-bashing concern that the price is inappropriate, and the folks who are charging these prices for jeans and facelifts don’t feel guilty about their prices.

So why is it different in the CTA business? I think part of the reason is because what you’re offering is an investment. It’s not money in exchange for something that’s totally unnecessary, like jeans or a facelift. It’s money in exchange for more money, and this is where people who are all twisted up about money get even more twisted up. If the service you offer is to turn a little money into a lot of money, for some reason, charging a lot for that service, which very few people can do, is where compensation inexplicably becomes a concern.

This thinking is too messed up for words. Just as no one needs $400 jeans or a $40,000 facelift, no one needs to allocate to a CTA. They do it for their own self-interest. They do it because they want more money. And the CTA who gives them more money shouldn’t feel one bit guilty about charging what that service is worth.

And so many of you are charging less than what your services are worth because you do feel guilty. I know CTAs who for years have earned their customers consistent and significant returns and taken a teensy fraction of that amount in incentive fees. Or maybe they’ve taken none at all. Maybe they’ve earned millions for their customers, but all they’ve received is per-trade commission.

This isn’t the first time I’ve covered this topic. We started talking about charging too little in the episode on fee compression, it’s Episode 3, if you want to go back and listen, but this topic of underearning is a big bugaboo for so many CTAs that it’s worth covering from as many different angles as we can. So today what I’d like you to consider doing, in making sure that you’re not charging too little, is to think about looking at what you charge in fees in exactly the same way that you would look at a trade. If you wouldn’t accept less than market price on a trade, I’d like you to consider whether it makes sense to do that with your fees.

If it doesn’t make sense, then what you do is look at the reasons you’re charging what you charge. Look at the reasons you’re charging too little.

If you picked your incentive fee percentage out of a hat, and your customers are paying that amount, and you’re generating massive profits for your customers, that’s a good sign that your customers, or other people like them, if not these exact customers, would be willing to pay more. In many cases, much more, because you’re providing massive value. And if they would do that, but you’re not charging it, that’s how you know when your compensation scheme is out of whack.

We all want to maintain good customer relationships. No one wants to gouge a customer. Or at least those who are likely to achieve sustainable success as CTAs feel this way. Since I started this show I’ve gotten a few calls from would-be CTAs who’ve never placed a trade, but who’ve been listening to the podcast, and absorbing the message that there’s a lot of money to be made in this business, and they want to know how to grab some of it. So I want to make it very clear here: if you’re one of these people who has no idea how to trade and you’re only contemplating getting into this business because you’ve heard it’s lucrative and you have a hankering to go out and lease a new Lamborghini, this message about undercharging is not for you.

This message is for the CTAs who really know what they’re doing. The reason I want you to hear this message, that you need to charge what your services are worth, is this: there are basically two kinds of CTAs. Those the world would love to give money to, because you create massive value, and those who would love to take money from the world, while providing little or no value in exchange. I work with the former type of CTA, not the latter, and the reason I want you CTAs who are very gifted at what you do, and who are providing massive value, to know that you can charge what makes it worth your while to get into this business, and stay in it, is because I love this business and I want to see more people like you in it.

And the way forward, the way to get truly gifted CTAs off the sidelines where they’re trading only for themselves, is to make it worth their while to get into the business. If you’re an artist, if you’re truly skilled at trading whatever it is you trade, you do something that few people on the planet can do, your audience attaches a premium to that, and they will pay you a premium, even if they don’t yet know who you are. Your people want to pay you, and they want to pay you handsomely, so that they, too, can enjoy participating in what you do. If I need a heart surgeon, the last thing I want is for the best heart surgeon in the world to say, “Sorry, lady. It’s just not worth my time to deal with you. I’m so good at this, I only do heart surgery for myself and my family members.” The world needs more people who are at the top of their fields, and the CTA business is no exception. The people at the top deserve top compensation, not just for money’s sake but for the sake of recognition and praise that we also attach to compensation. Providing this is the way we draw the truly gifted among us out of the shadows and to interact with the rest of us, but we can’t provide it to you if you won’t take it.  We can’t pay it to you if you charge too little.

So I’m going on record here: I, for one, have had it with CTA guilt. I’ve had it with hand-wringing about how much is too much. Too many CTAs are charging too little because they’ve bought into a message that says 20% is the max, and even that might be too much, from people who really have no idea what they’re talking about.

This message is the thing that’s keeping CTAs down. It’s keeping CTA compensation out of whack.

If this is you, if you’re a CTA who could make more but is making less, I’d like you to think about why. You’re someone who makes money by transacting at the market price, by trading at the market price. I’d like you to consider doing the same thing with your compensation. If you need some help with this, let me know. I’m here for you. kelly@profitablecta.com. I’d like to thank you for joining me today, and I look forward to connecting with you in the next episode.

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