Commodity Trading Advisor (CTA)

Definition of a CTA

A Commodity Trading Advisor (CTA) is an individual or company that provides advice on investing in managed futures. Services offered by CTAs include managing investment accounts and trading futures on behalf of clients. Although the title might suggest that CTAs deal exclusively in physical commodities such as grains, metals, and energy sources, managed futures can also include financial instruments like bonds and currency.

Investing with a CTA

Through investments in managed futures, CTAs present clients with the potential to decrease their overall portfolio risk and the opportunity to see a return in different market climates while providing increased transparency.

In the United States, CTAs must register with the federal Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), a self-regulating body. CTAs operating outside of the U.S. are governed by their respective government regulatory body. Potential investors can confirm that a CTA is registered with both the CFTC and the NFA and check for disciplinary records through the NFA website. CTAs must provide clients with monthly account statements and maintain updated disclosure documents that outline their trading methodology, performance markers, investment risks and fees.

The cost of investment can differ between CTAs and is influenced by the CTA’s strategy, performance record, and typical clientele profile. Potential fees include a management fee (based on the amount invested), an incentive fee (based on performance above a watermark), a per-trade fee, a percentage of interest income fee and a commission. All fees charged by a CTA must be clearly outlined in the Total Fee Load, one of the required disclosure documents. In addition to fees charged directly by the CTA, investors are responsible for paying taxes on their returns. Managed future profits are taxed at a split rate: 60 percent of income is taxed as long-term capital gains and the remaining 40 percent is taxed as short-term capital gains, which have a higher maximum tax rate.

CTAs usually require a minimum investment, which varies depending on several factors. More experienced CTAs and those who serve high-net-worth investors, for example, are likely to set higher minimums. Generally, minimum required investments begin at $10,000.

Becoming a CTA

In order to become a CTA, a financial advisor or trader must first pass a proficiency exam. Most CTAs are required to take the National Commodity Futures Exam, unless, based on their NFA registration and business status, they are eligible for an alternative test. Before registering with the NFA, CTAs must also disclose prior disciplinary action against them and submit a fingerprint card.

An individual or firm (including each employee who provides financial advice to the public) that wishes to conduct business as a for-profit CTA must register with both the CFTC and NFA. Individuals and companies who have provided advice to fewer than 15 people in the past year, those who disseminate specific kinds of educational materials, those who are registered as certain other types of financial advisors or who are educators and those who fall into several other categories outlined in the Commodity Exchange Act are exempt from the registration requirement. To receive a registration exemption, CTAs must file a notice of exemption with the NFA each year.

The required NFA and CFTC registration fees represent a portion of the costs associated with operating as a CTA. Other potential expenses include office space rental, office equipment, marketing materials and administrative, legal, and accounting staff. Marketing funding can foster business growth, but marketing materials are tightly regulated. For example, all information in such materials must be factual and must be accompanied by clear statements of risk. Given the complicated rules governing CTAs, legal and accounting counsel can prevent regulatory violations and allow CTAs to focus more time on their own area of expertise.