Percentage Allocation Management Module (PAMM) accounts allow you to interact with the financial markets without needing to do any of the work. In fact, you don’t need to have any knowledge or experience of how online investment markets work, as a PAMM trader will be buying and selling assets on your behalf.
In this article, we explore how PAMM accounts work, review the best PAMM accounts of 2021, and provide tips on how to pick the right account for you.
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What is a PAMM Account?
In a nutshell, PAMM accounts operate in a very similar nature to mutual funds. This is because you will be entrusting your money with a third-party who will be trading on your behalf. As such, you will be able to gain exposure to the financial markets without needing to have any experience of trading.
With that being said, there are some clear differences that set PAMM accounts apart. For example, your money will be placed with a seasoned trader that has a good track record in buying and selling investments online, as opposed to a large-scale company.
Moreover, the trader that you opt for will likely be engaging with day trading strategies, rather than buying and holding assets for a number of months or years.
Crucially, PAMM account traders will always put their own money into the investment portfolio, as it ensures they are financially motivated to trade in a risk-averse manner. In return for their efforts, PAMM traders earn a commission on any profits they make for you and your fellow investors. This commission is taken before your personal profits are realized.
How do PAMM Accounts Work?
Before we get to the underlying make-up of the agreement you enter into with a PAMM trader, we need to explore how an investment actually works. Firstly, it’s best to view a PAMM account as a wider portfolio, with each stakeholder owning part of the investment. This consists of your share, the share of your fellow investors, and then the share of the PAMM trader themselves.
- For example, let’s say that you invest $10,000 into a PAMM account.
- One other investor also investments $10,000.
- The PAMM account trader personally invests $30,000.
As you can see from the above, this PAMM portfolio would consist of $50,000 in investment funds. You and the other investor both own 20% each, while the trader owns 60%. This means that whatever money is in the PAMM account, you will always own 20% of the balance.
Now, let’s say that in the first month of trading, the PAMM account manager makes gains of 30%. On an initial portfolio size of $50,000, this equates to profits of $15,000. As the PAMM trader charges a commission of 10%, this means that they made $1,500, leaving the remaining $13,500 to be distributed across all shareholders.
- The total PAMM account is worth $63,500 at the end of month one.
- You 20% stake is now worth $12,700.
- The other investor’s 20% stake is worth the same.
- The PAMM trader’s 60% stake is worth $38,100.
Ultimately, by allowing an experienced trader to buy and sell investments on your behalf, you were able to make a tidy profit of $2,700 without needing to lift a finger!
PAMM Account Agreement
The process of investing money into a PAMM account isn’t as simple as transferring money to a trader and then allowing them to invest on your behalf.
On the contrary, there are a number of procedures that need to be considered. For example, you will need to sign some sort of Limited Power of Attorney over to the trader, which gives them authorization to trade on your behalf.
This also ensures that there is no legal come-back for the trader in the event they lose money. You then need to think about the specifics of getting the trades placed and looking after your balances. This role is reserved for a regulated online broker that has the capacity to facilitate PAMM accounts.
In this sense, there are two methods in particular that allow you to engage with PAMM accounts – going direct with an eligible broker or using an intermediary.
Broker-Direct PAMM Accounts
- A number of regulated brokers in the online space have the capacity to offer PAMM accounts. You start the process by opening a trading account as you normally would, verifying your identity and then depositing funds.
- After that, you would then head over to the PAMM account section of the site, where you will get to view a long list of traders that offer their services.
- You’ll need to spend some time assessing the historical trading history of the individual, as well as the types of assets that they like to trade. When you find a PAMM trader you like the look of, you normally need to agree on a commission structure with them.
- You’ll then be required to allocate some of your funds to the trader, who will proceed to invest on your behalf.
One of the overarching benefits of going directly with a broker is that you will be using the best trading platforms, with great regulation. Ideally, the platform will hold licenses with well-known regulatory bodies like the FCA, ASIC, and CySEC. You will also find the process of depositing and withdrawing funds much easier, as regulated forex brokers usually support debit/credit cards, e-wallets, and bank transfers.
Third-Party PAMM Accounts
- The other option you have is to use a third-party PAMM account provider. These platforms sit between you, the trader, and the brokerage firm.
- Although this option comes with less flexibility, it’s potentially more suitable if you wish to automate the entire process.
- For example, once you have deposited funds with the third-party, there is often no need to choose a PAMM trader yourself. Similarly, there is no requirement to negotiate a commission fee with the trader, as this is taken care of by the third-party.
- This option also gives you access to independent traders that do not use traditional PAMM account brokers.
What you do need to look out for when using a third-party PAMM provider is whether or not the platform holds a license. If it doesn’t, you are potentially taking a risk on the safety of your funds, as you won’t have the backing of a regulated broker.
Pros & Cons of PAMM Accounts
- Trade without requiring knowledge of how investments work.
- No need to dedicate any time to trading as everything is passive.
- Utilize the skills of seasoned investors with a long-standing track record of making money.
- Choose a trader that is experienced in your preferred asset class.
- PAMM traders are required to put their own money into the portfolio.
- There isn’t an over-abundance of trusted PAMM account providers in the space.
- There is never any guarantee that you will make money.
- You have no say over the specific orders the trader makes.
Best PAMM Accounts for 2021
If you like the sound of being able to earn passive income via a PAMM account provider, your next challenge is finding a platform that meets your needs. Even more importantly, you need to ensure that your chosen provider is credible and that the required agreements are in place to safeguard your investment.
To help you out, we’ve reviewed many providers and picked out the best PAMM accounts for 2021. Have a read through each provider before taking the plunge to ensure you find a platform that mirrors your long-term aims.
Finding the Right PAMM Account for you
On the face of it, PAMM accounts seem to solve a lot of problems for retail investors. Not only do you get to trade full-time without needing to have any knowledge or experience of financial instruments, but the entire process is passive. However, the space is dominated by scam platforms that operate without the required regulatory license, so it’s crucial that you perform your own research.
To help you find a reliable platform that suits your needs, keep the following factors in mind when comparing the best PAMM accounts.
- Type of Platform
You first need to explore what type of PAMM account you will be opening. For example, will you be using an all-in service with a third-party, or will you go direct with a broker that supports PAMM accounts? This is crucial, as you need to understand how your investment is protected.
- Minimum Investment
PAMM providers often ask for a much larger upfront investment than if you were just depositing at a regular broker. This ensures that the investment is worthwhile for the PAMM trader, as they will be operating on a commission model. For example, highly rated forex trader FXTitan requires a minimum investment of $2,000.
- Commission Structure
You also need to have a firm grasp of the commission structure in place, as this can vary quite widely in the PAMM space. For example, the most favourable plan offered by World Markets comes with a commission of just 10%, but you will need to deposit €25,000. Over at FX Pig, top-rated trader FXTitan requires a commission of 35%. If you are going direct with a regulated broker, you will often need to negotiate your own commission structure with the trader.
- Maximum Drawdown
In the world of PAMM accounts, the drawdown is an important figure to understand. In its most basic form, this is the maximum amount that the trader’s portfolio has gone down by, in relation to its peak value. For example, let’s say that the portfolio starts off at $10,000.
In the following month, the portfolio goes up to $12,000. In month three, the portfolio value goes down to $10,800, which is a drop of 10% from its peak. As such, the maximum drawdown is 10%. Crucially, you wouldn’t want to go with a PAMM trader has a double-digit drawdown, as it indicates they place higher-risk investments with less success.
- Liquidity
On the one hand, you shouldn’t invest in a PAMM account if you think that you will need to keep dipping into your portfolio. After all, the process should be viewed as a long-term investment that will allow you to grow your money over time.
However, there might come a time where you actually need to access your PAMM account funds and wish to make a withdrawal. With this in mind, make sure you understand the redemption policy of your investment, as you might need to lock your money up for a number of months before a withdrawal is permitted.
- Tradable Assets
You should also ensure that you are backing a PAMM trader that is active in your preferred asset class. For example, it’s no good investing money with a cryptocurrency trader if you want to gain exposure to the forex space. You should be able to view what financial instruments the PAMM trader is involved in prior to making an investment.
Conclusion
In summary, PAMM accounts tick all of the right boxes for those of you that wish to let someone take care of your trading in the background while potentially earning a passive income. Not only can you invest without lifting a finger, but you don’t need to have any significant knowledge of how investments work. Instead, the PAMM account trader is responsible for managing your money. In return, they get to keep a percentage of your gains in the form of an agreed commission structure.
With that said, there is never any guarantee that you will make money with using a PAMM account provider. This is why you are best advised to do your research and diversify your portfolio across several PAMM traders. In doing so, you still stand the chance of making money even if one of your traders has a losing month.
FAQs
Both PAMM and multi-account manager (MAM) accounts give you the luxury of investing without needing to have any experience of trading. With that said, MAM accounts give you less flexibility than PAMM accounts, as the money manager will decide where your funds should be allocated.
You need to use the information that you have at your fingertips. By this, we mean performing heaps of research on the trader. For example, what is their month-by-month average return, and how many years worth of verifiable trading results do they have?
There isn't a single PAMM account provider that particularly stands out, as it all depends on the type of service that you are after. If we are talking about an all-in, fully managed PAMM service, then it might be worth opting for World Markets.
The main fee that you need to pay when using a PAMM account is the trader's commission. Some providers also charge an annual maintenance fee, so be sure to check this before signing up.
PAMM account traders will each have their own asset class that they like to target. Whether you're interested in stocks, cryptocurrencies, forex, or commodities, there is likely a PAMM account that covers it. PAMM vs MAM - What's the difference?
How do I know if a PAMM trader is worth investing in?
What is the best PAMM account?
How much do PAMM accounts cost?
What markets do PAMM account traders invest in?
