What is the difference between an independent currency hedging adviser and an FX broker?

What is the difference between an independent currency hedging adviser and an FX broker?

What is the difference between an independent currency hedging adviser and an FX broker? 5000 3863 Bondford FX


Since early last year, I have spoken to a large number of Finance Directors (FDs) and Treasurers who, at least at the outset of our discussions, have mistaken Bondford to be a foreign exchange (FX) brokerage. I can completely understand why they might think this, as the meaning of the word ‘independent’ is not always intuitive when it comes to FX service providers. Furthermore:

  1. The majority of sales calls FD’s and Treasurers receive regarding FX services are from FX brokers (e.g. MoneyCorp, Western Union, and AFEX). It is unlikely that an SME has ever been approached by an independent currency hedging adviser, as they typically focus their attention on larger corporates and institutions. In turn, FD’s and Treasurers may understandably assume that any company approaching them to offer “currency hedging advice” or related services must be another FX broker looking for transactional flow. 
  2. There may be some confusion between the term “independent adviser” and “independent business”. Independent businesses are classified as being private, not publically owned. An independent adviser is something that, in this context, has an entirely different meaning. We’ll explain this in more detail below, but in short, a brokerage can be an independent business, however, they cannot offer “independent” hedging advice. 

This article attempts to explain the difference between FX brokers and independent currency hedging advisers. We’ll discuss why we feel that it is important to seek independent advice regarding your currency hedging, and we’ll conclude on some next steps for those considering engaging an independent consultant. 

What is an FX broker? 

An FX broker acts as an intermediary between their clients and a panel of Tier 1 banks, leveraging their purchasing power and lower operational costs to help clients, particularly SMEs, gain access to wholesale, competitive exchange rates which are typically reserved for larger corporations. 

In addition to offering currency exchange services, FX Brokers have the ability to offer flexible credit facilities for forward purchasing, international payment services, and currency hedging advice. These auxiliary services are often used as a means to differentiate themselves from other FX brokers and to justify higher commissions. Some brokerages may even market themselves as “currency risk strategists”, but ultimately their revenue is generated by converting currency, providing credit facilities and making international payments. 

Brokers are paid through a transactional “spread”. This spread is calculated based on the difference between where they buy from their panel of banks to where they sell to their clients. Costs are highly opaque and difficult to measure without FX TCA tools (see blog on this topic here). This business model creates a conflict of interest between the client and broker, as the latter is directly incentivized to:

  1. Maximize commission or spreads on FX transactions
  2. Promote hedging products or strategies that are highly profitable to them, but do not necessarily address the needs of their clients

As the brokerage market becomes ever more saturated and competitive, these firms are seeing margins in their straightforward spot and forward FX business being squeezed. As such, cases involving the mis-selling of foreign exchange hedging products are frequently evident and clients are susceptible to poor practice, due to the incentives outlined in points 1 and 2 above.  

For an example of this, please see this case-study on Newstar Garments who were mis-sold target accrual redemption forwards (TARFs) by their FX brokers, causing $5 million in losses.  

What is an independent currency hedging adviser?

An independent currency hedging adviser provides expert, impartial guidance to its clients when they are assessing and selecting FX hedging products and related risk strategies. 

Acting as a fiduciary, the adviser’s role is to ensure that clients are well educated on ‘all’ hedging products and solutions that are available to them, and the potential impact each decision may have on their business. In particular, they help to protect clients from being mis-sold unsuitable hedging products or strategies by their Bank(s) or FX broker(s) that:

  1. Are unnecessarily costly
  2. Are unsuitable or overly complex
  3. Will not help them to accurately achieve their commercial and/or risk objectives. 

Independent currency hedging advisors act as a true extension to their client’s finance function and are specialists in managing exchange rate risk. Using their extensive product and strategy expertise, in tandem with their independent positioning, they are best positioned to offer clients highly effective, robust hedging solutions that will accomplish their unique objectives at minimal cost.

Independent advisers are paid in consulting fees which are clear and transparent. To maintain their impartiality, zero revenues are generated from FX brokerage, either directly or indirectly. Clients of independent advisers are therefore not required to “move business away” from their relationship bank(s) which can often result in higher auxiliary service costs. Their business model ensures complete alignment of interest between the client and adviser. 

Why corporates should seek ‘independent’ currency hedging advice?

Here is a summary of why a corporate may choose to engage an independent hedging adviser: 

  1. Independent hedging strategy expertise
    • By combining risk management expertise with their independent positioning, advisers provide their clients with confidence that their hedging strategy has been comprehensively and impartially considered against all alternatives and the selection made is the optimal choice to ensure they achieve their commercial and/or risk objectives 
  2. Lower FX trading costs 
    • By utilising independent advisory tools and market expertise, clients are better positioned to scrutinise and negotiate the pricing offered to them via their Bank(s) and/or FX broker(s) 
  3. Reduced counterparty risk 
    • By receiving independent guidance on which counterparties are more creditworthy to trade with, clients can minimize the risk of default on hedging contracts
  4. Reduced workload and operational risk
    • Service enables clients to focus on their core business and have experienced consultants do the “heavy lifting”
  5. Improved performance visibility 
    • Clients have better visibility into the performance of their hedging strategy as an advisor can provide measurement tools

Next steps

Have you questioned the suitability of FX hedging products or strategies sold to you by your Bank(s) and/or FX brokers? Would you be interested in gaining an independent perspective on the effectiveness of your currency hedging strategy? Would you like to know how much FX costs you on an annual basis and the potential cost-savings that could be achieved?

Contact us today to get a free TCA report or schedule a free introductory call with one of our experienced strategy consultants. We’d love to hear from you.