PAMM accounts allow you to invest money with an experienced trader, who will then buy and sell assets on your behalf minus the commission. The overarching benefit of PAMM accounts is that you get to actively trade the financial markets without lifting a finger.
With that said, the end-to-end process can appear somewhat confusing at first glance, as there are three stakeholders involved. This includes the investor (you), the trader you invest with, and then the actual brokerage firm that facilitates the trades.
In this article, we explore the ins and outs of how PAMM accounts actually work. We also discuss some of our top-rated PAMM account providers of 2020, alongside some handy tips on what you need to consider before parting with your money.
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What is a PAMM Account?
Before we discuss our top-rated providers of 2020, it’s important for us to explain how PAMM accounts actually work. In its most basic form, Percentage Allocation Management Module (PAMM) accounts allow you to invest money with an experienced investor. These are investors that have a long-standing track record in the online trading space, alongside results that you can independently verify.
Much like a more traditional mutual fund, your money will be pooled together with other investors. This allows the trader to buy and sell assets at a much greater volume, subsequently increasing the amount of profit that they can make. In return for paying a fee for such a service, you will be entitled to your share of the proceeds.
There are three stakeholders involved in the end-to-end PAMM account process. This includes:
The investor is the person that injects money into the PAMM account service, with the view of making money in a passive manner. This is especially suited to those of you with little to no experience in the financial markets, as well as those that do not have time to actively trade throughout the day.
In order to benefit from PAMM account services, you will need to allocate your funds to an experienced trader. The trader in question will then be tasked with buying and selling financial instruments in the online space, with the view of making long-term gains. What’s in it for the trader? Well, most PAMM account agreements come with a profit-sharing arrangement. This means that in theory, the trader will make more money as their capital increases.
The Brokerage Firm
Once the trader raises capital from investors, they then need to use an online brokerage firm that allows them to offer PAMM services. After all, you are entrusting your money with a third-party trader, so it’s absolutely fundamental that certain safeguards are in place. At the forefront of this is a Limited Power of Attorney agreement. In Layman’s terms, this means that you authorize the trader to buy and sell assets on your behalf, at the specified online brokerage platform. Crucially, this means that you take full responsibility for any losses that the trade makes on your behalf.
How do PAMM Accounts Work?
When it comes to the investment process, there is a revenue share model in place. This means that the PAMM account trader that you entrust your money with will be financially motivated. Their fee is typically based on a percentage of their monthly gains.
Before we get to a real-world example, we first need to understand the underlying make-up of the PAMM account arrangement. To keep things simplistic, let’s say that the PAMM account trader is managing money on behalf of four investors. As is always the case, the individual trader will need to have a personal stake in the agreement. This ensures that they manage your money in a risk-averse manner, as they have their own funds at stake.
- Investor A (you) has a 15% stake in the PAMM account, which amounts to $15,000
- Investor B, C, and D also have a 15% stake
- This takes the investor’s total stake in the trader to 60% – or $60,000
- The balance of 40% is invested by the actual trader at $40,000
All in all, the trader has an account balance of $100,000.
Now we know the make-up of the agreement, let’s look at a quick example of what a profitable month might look like.
Example of PAMM Account Month-End Settlement
- The trader actively buys and sell forex pairs throughout the month of May
- The trader has an excellent month, making gains of 20%
- On a balance of $100,000, this means that the PAMM account is now worth $120,000
- In theory, this means that your initial investment of $15,000 has grown by 20%
However, the PAMM account trader is in the space to make money, so they will first take their share of the profits. Let’s say that the trader’s commission is 10%.
- The trader made 20% in May, which amounts to gains of $20,000
- By taking a 10% commission, the trader will make an additional $2,000
- This means that there is $18,000 in profit left to distribute to all shareholders of the PAMM account
- 40% of this goes to the trade, and the remaining 60% is disturbing between the four investors
What Happens if the Trader has a Losing Month?
In the above example, the trader made a rather juicy 20% in the month of May. Great! However, there’s no guarantee that the trader will make gains each and every month. Any PAMM account platform that tells you otherwise is providing false information. As such, we need to evaluate what happens if the trader ends a month at a loss.
- In the month of June, the trade makes a 10% loss
- Assuming nobody cashed out their profits from May, this means that the portfolio lost 10% of $120,000
- At a loss of $12,000, this takes the PAMM account balance to $108,000
- Although your overall invest in the account is in profit (as it started with a balance of $100,000), the trade will not make any commission this month
As there is always be the potential for the PAMM account trader to encounter a losing month, this further highlights the need to avoid withdrawing funds out. In doing so, you aren’t perpetrating yourself for the eventually that at some point, the balance of your account will go down. This is no different from investing in a mutual fund. That is to say, while the best mutual fund providers have more winning months than losing ones, the occasional losing month is encountered nonetheless.
PAMM Account Drawdown
An important metric that you need to look out for when choosing a PAMM account provider is that of the ‘drawdown’ percentage. For those unaware, this is the maximum percentage loss a PAMM account trader has encountered, in relation to the peak value of the account.
- For example, let’s say that the account is worth $200,000 in month 1, and $220,000 in month 2.
- The peak of the PAMM account is $220,000, as this is the highest amount the portfolio has been worth.
- If in month 3 the PAMM account was worth $190,000, we would need to calculate this figure against the peak – which is $220,000.
- This means that the maximum drawdown on the account is 13.6%.
In Layman’s terms, this means that had you invested in the PAMM account at its peak in month 2, your overall investment would be worth 13.6% less in month 3. In order to get back to a break-even figure, the trader would need to make gains of 15. 79%.
Ultimately, you need to find a PAMM account trader that has a low drawdown figure, preferably over a period of at least 12 months.
What is the Role of the Broker?
As noted earlier, an online broker is required to facilitate the trades of your chosen PAMM account provider. In return, the trader will need to pay a range of fees and commissions to the broker. As you have a financial stake in the trader, these are additional costs that need to be taken into account. Most importantly, the broker in question needs to have the capacity to support PAMM account agreements.
In other words, it is not as simple as investing with an expert trader, and then allowing the trader to use your money at any broker of their choosing. On the contrary, there needs to be a range of safeguards in place to ensure that [A] your money is ringfenced from the trader, meaning they do not have the capacity ot withdraw the funds out to their own account and [B] you are able to verify the investments that the trader makes on your behalf in a transparent way.
Choosing a PAMM Account Provider
One of the most challenging parts of the end-to-end PAMM account process is choosing a trade that you can entrust with your money. After all, it is the trader that will be making the key decisions in which assets and buy and sell, so it’s crucial that the individual has a long-standing track record of making gains in the financial markets.
To help you along the way, below we have listed some of the considerations that you need to make when choosing a PAMM account provider.
First and foremost, you need to ensure that your PAMM account is highly diversified. This starts at the very offset by ensuring you use multiple traders. For example, let’s say that you have $10,000 to invest. Instead of putting all of your eggs into one basket, it would be much more beneficial for you to invest in five different traders at $2,000 each. That way, if one of your traders encounters a losing month, there is always the chance that you will still end up in profit.
- Account Minimum
PAMM account providers will each stipulate an account minimum. This is the minimum amount of money that you are required to invest in the trader. While in some cases this might stand at a few hundred dollars, some platforms will require significantly more. Crucially, you need to ensure that you are only investing an amount you are comfortable with.
- Asset Classes
PAMM accounts cover virtually every asset imaginable. Whether its blue-chip stocks, currencies, energies, or gold, there is likely to be a trader that has expertise in your preferred market. With that said, you should also consider diversifying across multiple asset classes, just as you are diversifying across several different traders. In doing so, you won’t be overly exposed to a single market.
- Verifiable Track Record
You might come across a PAMM account provider that claims to make in excess of 70% per month. As great as this sounds, is there a way for you to verify this information? If not, the claims are unlikely to be valid. With this in mind, stick with providers that give you access to verifiable trading results.
This should include key metrics like the types of assets the trader buys and sell, what kind of stakes they employ, and what their month-by-month returns look like since the trader joined the platform. Similarly, your research process should also make considerations for the maximum drawdown figure that we discussed earlier.
PAMM account traders are in the business of making money. This is why they seek to manage your investments, as they stand to make larger profits. As such, the trader will get a percentage of any profits that they make on your behalf. There isn’t really a hard-and-fast-rule as to how much you should be paying, as the commission should mirror that the trader’s experience, skill-set, and historical results.
In other words, it’s much better to pay 20% in commission to a trader that consistently makes gains, than it is to pay 5% for a trader that struggles to make a profit! Don’t forget, some of your profits will be eaten away at by the commissions charged by the broker, so make sure you understand how this works before signing up.
- Choice of Brokerage Firm
You’ll want to ensure that the PAMM account provider is using a regulated brokerage firm to facilitate your trades. The platform in question should be licensed by tier-one bodies like the FCA, CySEC, or ASIC. This will ensure that your funds remain safe at all times.
Similarly, the broker must have the capacity to support Limited Power of Attorney agreements that come with a PAMM account. In doing so, this provides authorization that you are happy for the trader to make investments on your behalf.
In the payments department, you need to assess how you will be able to get money into and out of the PAMM account. The easiest way to do this is to deposit funds with a debit/credit card, and your payment will be processed instantly. Higher limits are offered available when using a bank account, although this will delay the process by a few days.
PAMM Account Types
There are two methods that you can take in your hunt for a PAMM account service.
End-to-End: The first option is using an end-to-end provider that facilitates the entire process for you. They essentially act as a middleman between investors (you) and the online brokerage firm. The PAMM account provider will likely have a number of in-house traders, which you may or may not get to select from individually. As we cover shortly, this includes the likes of World Markets and FXTitans.
Via a Broker: The second option that you have at your disposal is to go directly with an online broker that facilitates PAMM accounts. You’ll be signing up with a regulated platform like AVATrade, Insta Forex, or Alpari. The process involves opening a trading account, depositing funds, and then choosing a PAMM account trader to invest with.
The option that you go with will ultimately depend on personal preference.
Best PAMM Accounts 2020: Our Top Picks
So now that you know the ins and outs of how PAMM accounts work, you now need to start thinking about which provider you want to sign up. As of 2020, there are literally hundreds of options to choose from, across both end-to-end managed accounts and direct brokerage services. With this in mind, we have narrowed our list of the best PAMM accounts down to just five.
Be sure to take some time reading through our viewpoints on the recommended platforms listed below before signing up.
1. World Markets - End-to-End Pamm Account Services via a Single Platform
World Markets is a Jack of All Trades in the online investment space. The platform offers everything from fully-fledged trading accounts, to automated AI strategies, and of course, PAMM accounts. As the platform has a direct feed to established broker HYCM, you'll be able to gain exposure to thousands of financial instruments. World Markets offers a 360-degree PAMM account service, and there are three account types to choose from. Firstly, the Trial Account gives you 30-days of unfettered access to its PAMM accounts, although you will need to meet a €2,500 minimum deposit.
If at any point within the first month you are not satisfied with the end result, you can simply withdraw your balance back out. If you do decide to remain at the platform, you'll get to choose from the Standard Account or Gold Premier Account. The former, which requires a minimum deposit of €5,000, comes with a 20% profit sharing fees. So, if the trader makes you €500 in month 1, World Markets get to keep €100 of this, leaving you with €400 in gains.
Although this might sound expensive at first glance, you need to base the revenue share on the overall results. On top of this, you'll also pay a 1% annual maintenance fee. World Markets does not charge a mark-up on the spreads it is able to obtain, which is great. You will only be able to withdraw your balance at the end of each month, so do bear this in mind. Finally, there are no deposit or withdrawal fees to contend with, unless you are using a credit card.
In terms of the Gold Premier Account, the performance commission is reduced down to 10%, and won't pay any annual maintenance fees. The account comes to with a number of additional perks - such as dedicated weekend support, affiliate bonuses, and a free safety deposit box. With that said, you will be required to meet a €25,000 minimum account balance to qualify for this particular plan.
- 30-day trial account with a minimum deposit of €2,500
- Upfront about their revenue share model of 10-20%
- No mark-ups on spreads or pips
- Minimum investment on standard account is €5,000
2. FX Pig - Middleman Between you and Independent Forex Traders
FX Pig is an online platform that provides PAMM account services to everyday investors. The platform actually partners with a number of pre-vetted forex traders, and then acts as an intermediary between you and the trader in question. The four PAMM account traders in particular that FX Pig has partnered with are FXTitan, Vola, True Move, and Onda.
With that said, it's well worth spending some time analyzing each forex trader, such as the types of currencies like to buy and sell, whether or not they have a tendency to apply leverage, and of course - what their historical trading results look like.
Once you have found a trader that you like the look of, FX Pig can facilitate the entire PAMM account investment process. You will need to deposit at least $500 to get started, and supported payment methods include a debit/credit card, Skrill, Neteller, and a bank wire. Some PAMM account traders have a higher minimum deposit amount, with the likes of FXTitan requiring at least $2,000. The same trader has a performance fee of 35%, which is huge.
This means that for every $100 in profit you make, $35 is retained by the trader. However, it is also important to note that FXTitan has a phenomenal track record in the online forex trading space - so some investors are happy to pay 35%. To date, FXTitan has a maximum drawdown of 8.8%, which is very good.%
- Can connect you with proven forex traders
- Get started with a minimum deposit of $500
- PAMM account traders are pre-vetted
- Profit share commission of 35% is huge
3. Insta Forex - PAMM Account Direct With the Broker
Insta Forex is an online broker that offers a range of financial instruments. This includes over 100 forex pairs, 88 CFD stocks, gold, silver, and options. This particular option is different from the previous two we have discussed, not lease because Insta Forex is actually a broker, as opposed to a third-party PAMM account provider.
As such, you will need to open an account directly with the broker, deposit some funds, and then chose the PAMM account trade that you wish to copy. Insta Forex allows you to allocate your funds across multiple traders, which is great for diversification purposes.
In terms of the commissions, this will vary depending on the type of account you have at the broker and the specific assets that the trader likes to invest in. In terms of regulation, Insta Forex is licensed by CySEC and the FSC. You can get money into your account with a debit/credit card, bank account, or e-wallet.
- Deal directly with an established broker
- Low minimum deposit amounts on standard accounts
- Regulated by CySEC and FSC
- Unclear on PAMM account commission model
4. Alpari - Flexible PAMM Account Agreements
Alpari is also an online brokerage firm that gives you direct access to PAMM account traders. Much like in the case of Insta Forex, you get to choose which traders you wish to back, based on their historical trading results and preferred asset class. Some of the traders at Alpari have a long-standing track record that exceeds seven years.
This is a tremendous amount of data to feed on, as it ensures you are not backing a trader that has enjoyed a couple of lucky months. In terms of the fundamentals, you will need to enter in an agreement with your chosen PAMM trader, where you both define the types of trading strategies that you wish to employ, as well as an agreed commission rate.
Importantly, all PAMM account traders are required to put an amount of capital upfront. This ensures that they are financially motivated to make you as much money as possible, while at the same time not taking irrational risks. Crucially, Alpari is a CySEC regulated online broker, so you're money remains safe at all times.
- CySEC regulated broker
- Established PAMM traders using the platform
- Traders typically put 40% of their money into the portfolio
- You ned to negotiate your own commission agreements
In summary, PAMM accounts allow you to gain exposure to the financial markets without you having an ounce of knowledge in the space. Similarly, they are also useful for those of you that want to trade on a full-time basis, but you simply don’t have the time. Either way, by choosing a set of expert traders to invest with, PAMM accounts are a great way to earn passive income.
With that said, the actual underlying make-up of a PAMM account agreement can be somewhat difficult to get your head around at first. This is because there are essentially three stakeholders involved in the agreement; the investor, the trader, and the brokerage platform. Nevertheless, not only have we cleared the miss on how PAMM accounts work, but we have also pointed you in the direction of our top-rated providers.
Ultimately, just make sure that you have a firm understanding of the risks. Sure, while a PAMM account trade might have an excellent track record in the financial markets, past performance is never indicative of future results. As such, there is never any guarantee that you will make money.
What does PAMM stand for?
In the context of PAMM account management, PAMM stands for Percentage Allocation Management Module.
What is the difference between a PAMM account and MAM account?
While PAMM accounts allow you to decide where your investment funds are allocated, MAM accounts give much more flexibility to the provider. In other words, MAM accounts are even more passive than their PAMM counterparts.
How much do I need to invest with a PAMM account provider?
This will vary depending on the provider you sign up with. In our experience, end-to-end providers (where the entire process is managed for you) typically requires at least $2,000 to get started.
What is the drawdown in PAMM accounts?
The drawdown is a metric used to quantify the historical track record of the PAMM trade. The calculation takes the difference between the PAMM's peak value, against that of the trader's highest percentage loss. For example, if the PAMM has an all-time high value of $100,000, and it is now worth $90,000, this means that the maximum drawdown is 10%.
How do PAMM account traders make money?
When you use a PAMM account trader, you agree to enter into a profit-sharing agreement. For example, if the trader gets 10% of all profits they make for the PAMM, and at the end of month 1 gains of $50,000 are made, the trader will get $5,000 in commission before the profits are distributed to investors.