How Financial Advisors Use & Think About Options

June 13, 2017

[This article originally appeared in our June 2017 issue of ETF Report.]

Everyday biases shape how we see the world. Many financial advisors have a subconscious response when they hear the words “exchange-listed options.” Although our biases may be helpful to make quick, efficient judgments, they can also blind us to new information.

A recent study conducted by Cerulli Associates, a research, analytics and consulting firm, sheds light on what financial advisors think about exchange-listed options and how they use them to help meet their clients’ financial goals. Cerulli Associates surveyed more than 600 financial advisors from five different advisory channels. The study was sponsored by The Options Industry Council (OIC) to identify target audiences and educational strategies that may lead to increased adoption of exchange-listed options strategies among financial advisors.

This article summarizes key findings from the 2017 Cerulli study: “How Financial Advisors Use and Think About Exchange-listed Options.”

Financial Advisors Use Options On ETFs
Using options on stock indices and using options on ETFs are a distant second and third to using options on stocks, but a significant percentage of advisors report at least sometimes using these two instruments. Though only 19% of advisors frequently use options that have ETFs as the underlying instrument, 40% sometimes use them. Approximately one-quarter each of independent RIAs and national and regional broker-dealer advisors frequently use options on ETFs.

Financial Advisors Expect to Increase Their Use Of Exchange-Listed Options
On average, advisors use options in 21% of their clients’ accounts, and expect to increase use by 30% in three years. At present, independent RIAs use options across 28% of client accounts, the broadest use across channels.

In addition, independent RIAs and hybrid RIAs expect the greatest increases in options usage rates across client accounts in the next three years, from 28% to 39%, and 22% to 33%, respectively.

By contrast, wirehouse advisors incorporate options in only 15% of client accounts. While wirehouse advisors report the greatest occurrence of options use (46% currently use options), these advisors incorporate them in only a small percentage of client accounts.

Financial Advisors Agree On The Benefits of Options
The types of clients for which advisors use options may indicate their perception of options’ inherent risk. One-third of advisors report never using options with conservative clients, and one-third report always using options for highly aggressive clients.

This behavior may indicate preconceived ideas about the “riskiness” of adding options to client portfolios. Whether these ideas are driven by the client or the advisor, OIC may have success increasing advisors’ understanding of exchange-listed options by encouraging advisors to evaluate how incorporating options impacts the risk characteristics of the entire portfolio, rather than focusing on the isolated or perceived riskiness of options as an investment vehicle.

Mega Team Advisors Use Options More Frequently & Diversely
Mega team advisors (practices with more than $500 million in AUM) use options for more diverse purposes than smaller teams. Like most advisors, income generation is a primary objective for these advisors; however, they place a greater emphasis on downside risk and portfolio diversification than advisors from smaller teams.

Almost 60% of advisors from the largest practices frequently cite downside risk protection as a goal of using options, while only 37% of advisors from smaller teams do. In addition, almost 40% of mega team advisors report portfolio diversification as a frequent motivation compared to the 25% of smaller practice advisors (see Figure 1).

Eric Cott is the director of financial advisor education at The Options Industry Council.

Financial advisors may receive a free copy of the 15-page Cerulli Associates study by visiting www.optionseducation.org/advisor.


The Options Industry Council (OIC), celebrating its 25th anniversary in 2017, is an educational organization funded by OCC, the world’s largest equity derivatives clearing organization, and the U.S. options exchanges. The mission of OIC is to increase awareness, understanding and responsible use of exchange-listed options among a global audience of investors, including individuals, financial advisors and institutional managers, by providing independent and unbiased education combined with practical expertise. Learn more about OIC at www.optionseducation.org/advisor.

Options involve risk and are not suitable for all investors. Individuals should not enter into options transactions until they have read and understood the risk disclosure document, “Characteristics and Risks of Standardized Options,” which may be obtained from your broker, from any exchange on which options are traded or by visiting www.OptionsEducation. org. Copyright ©2017 The Options Industry Council. All rights reserved.

 

 

 

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