Should You Perform a 'Wealth Check' Before Trading?

Some regulated brokers perform a wealth check before opening accounts for traders. Should traders consider doing this for themselves?

Where they are regulated by the Financial Conduct Authority, binary options brokers must perform a ‘wealth check’ on any potential new clients. It is nowhere near as onerous as it sounds- there are no credit checks or in depth verification processes.

The broker simply asks a series of questions regarding all new clients’ economic status, to ascertain if they are in a fit financial state to trade, and also to ensure that trading is within their financial means. Bear in mind, the last thing a broker wishes to do is turn away a potential customer.

So these checks revolve around things like disposable income, existing debts and financial dependencies. The questions have been put in place by regulators to ensure that any financial products are only given to customers where they are suitable. It aims to avoid any misselling or leveraged products being made available to people who do not fully understand the financial risk.

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There is, of course, a slim chance that potential new clients may be ‘economical with the truth’ when answering these questions. The regulations, however, are there to protect the consumer. If they misrepresent their financial means to the broker, the broker is no longer at fault – they made every effort to double check that their products were appropriate.

However, in the binary options sector very few brokers are regulated by the FCA. While this may change in the future, right now the majority of binary options brokers are under no obligation to check the financial health of any new traders. So should new clients consider performing the checks themselves, proactively? The sensible answer is ‘Yes’.

As described above, the actual wealth checks are little more than a few simple questions about income, outgoings and general financial well being. It should not take long for a potential trader to judge whether they are in a good financial position to start investing. While considering their current financial status, it is worth widening the subject a little too- consider these questions:

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Why am I investing?

What are my aims?

What are my timescales?

Once some of these questions have been considered, other answers may also become clearer. For example, a trader should consider very early what level of risk they are prepared to take. That answer should be more clear cut once the aims and timescales for investing have been established.

Binary options are a high risk investment vehicle. They offer high levels of return in order to balance that risk, but they sit firmly in the high risk basket of financial products. The aim of a wealth check then, should include whether binary options meet the investing needs of each trader. Where they do, a trading strategy may also emerge from this introspection, and this will doubtless improve the prospects for new traders.

So if we alter the original question to ‘should traders perform their own wealth and investment checks’, the answer is now categorical- ‘Yes’.

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