All Over the Country, Advisors Seek Customization for Select Clients

Advice to the Advisors

Man having suit tailored, customized to fit | Sheaff Brock Institutional Group

All Over the Country, Advisors Seek Customization for Select Clients

While visiting with Advisors around the country, the Sheaff Brock team found a common thread: advisors expressing a need to outsource, particularly for customization. Overwhelmed by the need to grow their practices by capturing new assets, maintain efficient practice administration, remain involved in their communities, and keep up with continuing education, outsourcing seemed to be the topic of the day.

With “traditional” outsourcing through the use of ETFs or funds often failing to satisfy the need for tailoring portfolios to their clients’ specific needs, advisors are increasingly turning to separately managed accounts. For clients with concentrated stock positions, even further customization is needed (a challenge mentioned by advisors in every location). When clients retire with (or inherit) single-stock positions comprising one-quarter to a third of their entire portfolio holdings, easing them out of that position while protecting the value over several years often proves far too time-intensive a responsibility for even the most sophisticated of practitioners.

Sheaff Brock believes that a collared option strategy for clients with a concentrated position is a consideration for financial advisors. The strategy is devised considering the specific concentrated holding and its industry, administered in keeping with a plan built around that single client’s time-frame and risk tolerances.

How does it work? A “collar” is structured around the stock shares by:

  • selling a call option to generate an option premium
  • using that money to purchase a put option (see chart below)

Collar Chart | Customization for clients with concentrated positions

As the Sheaff Brock investment team continued to discuss option strategies with advisors in different parts of the country, they found that there was, indeed, increasing interest among RIAs when it came to including options in client portfolios, reconfirming the findings of a previous Cerulli Associates study.

Given the pressures of practice management and growth, however, there was reluctance on the part of those same advisors to manage option strategies for their own clients. What advisors need, in particular for their clients with single-security concentrated positions, is an opportunity to consider outsourcing solutions.

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