Financial Advisors Seek Options to Buffer Risks

Terry Flanagan

In a calmer, bygone era, the U.S. stock market’s move to unprecedented highs would have led to a mentality of buying stock – it’s a bull market! – and not worrying about it. That was then, this is now.

OIC’s Eric Cott, director of financial advisor education, hosted an interactive booth at a virtual alternative investments conference this week. The program drew some 2,500 registrants, mostly from the advisor space. He said that number demonstrates growing demand for in-depth schooling on alternative products, especially a tremendous appetite for options.

Clients’ fear of the unknown is driving the reallocation from fixed income to equities, and alternatives, but risk management is the main ingredient the advisors are touting, Cott told Markets Media.

He cited demand for risk management using options to hedge or buffer the downside risks of owning stock as one driver for growth of exchange volumes, as well as a catalyst for increases in the wealth advisor space, and the recognition of the importance of understanding how options work.

“We’ve never been busier monitoring call volume on the 888 investor services line at OIC. Clients are driving their desire for options as a hedging strategy back to wealth advisors,” Cott said.

In the current, historically low interest rate environment, elderly and high net worth clients still need income yield. Therefore, advisors want to brush up on covered calls, Cott said. They recognize with positions on the books, they can present clients with a strategy to bring income to equity or ETF holdings that essentially will pay them to wait for the market to go higher.

“Many clients are expressing the fear of tail risk, asking, ‘how do I hedge?’ This invites the conversation about protective puts,” Cott noted.

Addressing comfort with and perceptions about exchange-listed options with clients, the most recent OIC white paper called “Tales from the Front” quoted one of ten advisor panelists on ways of getting around a client’s initial fears that a strategy might be overly speculative.

“Sometimes it’s better not to use the word options. We have a game on my team called ‘take the labels off’ where we’ll be routinely introducing product without the name, or asset class or what category it belongs to. We’ll say, ‘here are the characteristics of this investment – here’s the return profile, here’s the risk profile,’ without naming it.’” That said, once a client is engaged and interested, the paperwork can be introduced.

Firms like TD Ameritrade and Schwab have led the charge in providing more efficient and user-friendly technologies to their advisors and clients. The examples of TD Ameritrade’s acquisition of thinkorswim (2009) and Schwab’s 2011 purchase of OptionsXpress to help its 6,000 RIAS generate increased revenue on trades formed a trend. Said Cott, “Independents, through acquisitions, are getting enhanced technologies and platforms, and more sophisticated and higher net worth clients.”

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