An independent currency hedging advisor provides expert, impartial guidance to its clients when they are assessing and executing FX risk management strategies. 

Acting as a fiduciary, independent currency hedging advisors act as an extension to their client’s finance function and are specialists in managing foreign exchange rate risk. Using their extensive product and strategy expertise, they are positioned to offer clients highly effective, robust hedging solutions that will accomplish their unique objectives at a fair cost.

Independent advisors are paid fees which are clear and transparent. To maintain their impartiality, zero revenues are generated from FX brokerage, either directly or indirectly. Their business model is designed to ensure alignment of interest between the client and advisor. 

What is an FX broker? 

An FX broker acts as an intermediary between their clients and larger banks, leveraging wholesale purchasing power to help certain clients gain access to more competitive exchange rates. 

In addition to offering currency exchange services, FX Brokers have the ability to offer ancillary services including international mass payments, credit facilities, trade finance and sometimes currency hedging advice. These services are often used as a means to differentiate themselves from other FX brokers.

Brokerage firms 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.

This business model creates a conflict of interest between the client and broker, as the broker is directly incentivised to:

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

Incentivisation is both at the firm level and the individual level where sales teams are set aggressive commission targets to reward them for finding clients willing to trade. In addition to the inherent conflict of interest, commission spreads are opaque and difficult to measure.

How can corporate clients benefit from ‘independent’ currency hedging advice?

  1. 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 banks and/or FX brokers to ensure it is fair.
  2. Independent hedging strategy expertise
    • By combining risk management expertise with their independent positioning, advisors provide their clients with confidence that 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. 
  3. Reduced counterparty risk 
    • By receiving independent guidance on which counterparties are more creditworthy to trade with, clients can minimise the risk of default on hedging contracts.
  4. Lower workload and operational risk
    • Outsourced service provision enables clients to focus on their core business and have experienced consultants do the “heavy lifting”.

Next steps

Would you be interested in gaining an independent perspective on the effectiveness of your currency hedging strategy? Are you intrigued to see exactly what you’ve paid to banks and brokers, and understand how that compares to your peers?

Please sign up for a free trial today. You can upload a sample set of trades using our FX trade cost analysis (TCA) tool and see the results for free. We offer ongoing access for a low-cost monthly subscription.