Building vs. Buying a Forex Brokerage
October 10, 2016
Before starting a forex brokerage, the investor/investors are facing a difficult decision: to build a forex brokerage house from scratch or to buy an already existing one? There are advantages and disadvantages for both scenarios, so the actual decision should be the result of a due diligence process that will lead to the best course of action.
After all, such a decision is facing any investor that wants to enter a new business: either to start a new company or to buy a new one.
The forex industry is a bit more difficult, though, when compared with other industries as here we’re talking about a stiff competition and a large initial investment. Nevertheless, the decision process should be the same, should follow a SWOT (Strengths, Opportunities, Weaknesses, and Threats) analysis and the conclusion to be drawn should be the most appropriate one.
Building a New Forex Brokerage
In order to build a new forex brokerage house, a sound business plan needs to be in place. One needs to take into account incomes and expenses for the first three years minimum (an estimated level, of course), and the source and the amount of the original investment (own money, loan, etc.) in order to have an idea about the cost of capital as well.
A new forex broker should have a super-strong online presence in order to face the competition and needs to differentiate its core competence from the ones of other forex brokers. For example, a new brokerage house may decide to focus on providing the best execution, instead of having the lowest spreads or commissions.
There are a lot of traders that look for little or no slippage when trading big and they are in need for such brokers. This is just an example, but it could be a way to differentiate the offer from other brokerage houses.
Costs related to starting the business need to be carefully considered as well. Such costs are related mostly to the online presence (building a website, constant SEO – Search Engine Optimization, advertising), but also monthly fixed costs like wages for the employees, etc.
I’m not going to go and outline the business plan needed, but would rather focus on the overall challenges building a new forex brokerage faces. Such a challenge is how to grow the right customer based on as little costs as possible.
It is easy to say that you have a marketing budget of a certain amount, but the right question will be: how many real customers can I get with this kind of investment? Otherwise, there is the risk of stretching the expenses to a level when they cannot be supported anymore.
The main advantage of building a new forex brokerage business is that you can set it up the way you want it to be and target the customers accordingly.
Buying a Forex Brokerage
The main advantage of buying a forex brokerage instead of building one is the fact that it offers a quick access to an already built business and incomes are starting to pour from the very first moment. This is not happening when building your own business!
Building an infrastructure for the business is not the case anymore as it is there in the first place, as well as a customer base. These are the core assets that are being bought and the new owner/owners should invest in either expanding the business as it is or in a new direction.
The risk of buying an already existing brokerage house is client’s perception. If the brokerage that is being bought is not having a perfect reputation among traders, then no matter who the new owner is, this is a difficult thing to overcome.
Sometimes, the investment in changing client’s perception is bigger than the investment into opening a new forex business.
As mentioned at the start of this article, both ways have their advantages and disadvantages and the decision to buy a forex brokerage or to build one should be the result of a process that should take into consideration both potential profitability, as well as the costs of building brand awareness or buying one.