Who’s Talking About Option Strategies?Advice to the Advisor
The study results, published just a year and a half ago, represented good news for both Registered Investment Advisors and the Options Industry Council. The OIC had commissioned global research and consulting firm Cerulli Associates to find out how much interest and involvement there is among financial advisors when it came to including options in client portfolios. The report highlighted three important developments:
- One-third of financial advisors were already using options in 20% of their client portfolios.
- Advisors expected to increase the use of options by 30% over the next three years.
- The greatest increase in options usage rates over the next three years was expected to happen in independent RIAs and hybrid RIAs.
One interesting detail that came to light was that advisors who worked for wire houses and national and regional broker-dealers reported the highest volume of options trades compared to independent advisors. (Cerulli theorized that greater centralized support services were offered by the bigger organizations.) The study pointed out that advisors used options for diverse purposes. Large practices (those with more than $500 million in assets under management) placed an even greater emphasis on downside risk along with income generation. The OIC’s stated goal had been to “potentially increase market share of these valuable financial risk management tools.”
In former years, Sheaff Brock Institutional Director Jim Murphy recalls, options were often misunderstood, with many clients unreceptive to discussing options strategies, believing options fall to the far right area on the Efficient Frontier chart. Interestingly, today, Murphy is finding that in many cases it is the advisor who is reluctant to incorporate options in clients’ overall portfolio strategy (although, as the Cerulli study shows, this has begun to change). Lack of time and lack of backup support services, Murphy agrees, account for the greater part of advisor reluctance.
With advisors playing such an important role in helping their clients put stock market volatility into perspective, Sheaff Brock focuses on offering option overlay techniques built around existing portfolios. Outsourcing allows advisors to avoid the time commitment needed to direct options trades in client portfolios while yet attempting to satisfy their clients’ desire for:
- assets to be productive during flat markets
- enhanced cash flow
- risk reduction
With those client needs in mind, Sheaff Brock offers portfolio strategies using option overlays, with the goal of generating conservative, repeatable monthly yield from assets that would otherwise produce little cash flow. Overlay strategies may be recommended to investors who are comfortable taking additional stock market risk with the opportunity to earn added, net-of-fees cash flow, using as underlying collateral:
- concentrated positions of relatively stable corporate stock
- diversified portfolios of ETFs, stocks, and mutual funds
- municipal bonds
As part of comprehensive investment planning and risk management, shouldn’t you be talking with your clients about option strategies?