Each brokerage and sales team has its own sales strategy aimed at building its client books and growing its business in terms of client deposits and trading volumes. One of the sales techniques on which opinions remarkably differ is cold calling – whether it is still financially and strategically feasible to cold call clients and whether it is still an effective way to attract them.
What is a cold call? A cold call is an unsolicited contact with a prospect without any prior introduction directly or from a third party. In other words, it is not known if a prospect has expressed any interest in forex and/or this particular brokerage, or if a prospect is currently in a position to open and maintain a leveraged forex trading account.
We all know that the forex industry gets more and more regulated every day.
Cold calling was definitely big in the financial industry last century, where stockbrokers would rely on it to get their clients and build their books. It is sometimes still perceived as one of the most straight-forward and efficient ways to attract clients.
But is it?
It is evident that the forex industry is maturing and the cost of a lead is rising, not to mention the cost of a quality lead. Profit margins are getting thinner with smaller accounts bringing in less profitability and less commissions. There is no certainty as to what type of client will be reached with a cold call.
Moreover, in order to run a forex brokerage, regulation is a must. It gives clients the certainty that their interests will be protected as well as the security of their funds.
As head of sales for a group of companies that holds several licenses (FXOpen Australia and FXOpen UK with ASIC and FCA licenses respectively), I can say that while ASIC has been liberal on a number of topics mostly related to trading, such as high frequency trading and dark liquidity pools, it is one of the strictest regulators when it comes to sales practices. ASIC prohibits any financial incentives payable to sales people for deposits and/or trading turnover of the clients and, as with most regulators, it requires sales people to hold a license and make sure that the client understands the potential risks forex trading entails.
Which, let’s face it, is more than fair taking into consideration that forex trading is risky and was initially aimed at trading professionals and not retail clients.
In most cases sales people are torn between pushing clients into investing in high-risk instruments with little-to-no knowledge or experience and, at the same time, making sure that they have thoroughly understood the risks.
It doesn’t need to be stressed how much trouble the brokers have to go through to get a license and how easy it is to be fined and/or to get licenses revoked over an unsolicited cold call resulting in an opened live account and subsequent loss of client funds. The client will have all the legal and moral rights to complain to the regulator if he/she was pushed (even just a little) into opening an account with the potential trading risks not very clearly stated.
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So the question is: How can a cold call be performed under such circumstances?
First of all, let’s have a look at the average cold-calling statistics:
- 67% will not pick up a call from an unknown number
- 53% of prospects will end the conversation once they see it is a cold call
- 5% of successful conversations lead to opened live accounts
Obviously, the chances of a cold call turning into an eight-figure account are almost non-existent, the chances that it will be somewhere in your minimum deposit range are much higher.
If a sales person’s luck gets combined with a tremendous amount of pushing, 1% of the cold calls might turn into a live account and eventually a deposit. The question of whether the client will be trading and whether or not it will be in a way that is profitable for the brokerage firm is yet to be answered though.
When assessing the effectiveness of a cold call, the broker should take into consideration:
- Potential profits from the client
- Potential risks of a sales person not providing enough (or withholding) information on the risks of forex trading and the repercussions it might lead to
- Commission payable to the sales person (if any) and the amount of time it took to convert this one cold lead into a live account
- The probability that the client will open an account and deposit the funds
Furthermore, it raises an important question of business ethics – how many cold leads that just started warming up will be lost once the usual and legally necessary disclaimer on the risks of forex trading has been recited. Obviously this information cannot be withheld if a broker plans on doing serious business.
Unethical behavior of brokers who push their clients into investing without informing them of the risks reflects negatively on the whole industry, especially in the retail sector. While it might give them some short-term benefits, it most definitely will take its toll on the sustainability of their business in the long-run.
After recent CHF events which have altered the landscape of the whole industry, I believe all brokers should assume more transparency and more responsibility when it comes to explaining trading risks to clients.
Institutional cold calling might prove to be more effective, provided that the clients who are already active in this industry are being solicited and they might be open to communication. However, it is still less efficient than building a network of contacts and agents.
The main goal of almost every decent broker is to give clients the possibility to trade with a regulated broker who has their best interests at heart in transparent and fair trading conditions. With this in mind, cold calling is not an effective way to attract new business. It is not worth the time spent or the risks taken.
Building your client book and expanding your business network might act as a warming pad for potentially cold contacts. However, smart online marketing, strategic planning and always being one step ahead of client requirements (with a technologically superior product and transparent trading conditions) is much more effective, legal and fair than cold calling.