Best PAMM Accounts of 2021 – How do PAMM Accounts Work?

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 2021, alongside some handy tips on what you need to consider before parting with your money.

 

What is a PAMM Account?

Before we discuss our top-rated providers of 2021, 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

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.

The Trader

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.

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 2021: 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 2021, 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.

Conclusion

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.

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